The vast majority of private new car registrations are now made through personal contract purchase (PCP) finance, but finance houses need to be more open with how they share data on customers to increase renewal rates.
Recent data from Glass’s estimates PCP penetration increasing from 45% on new car sales in 2011 to as high as 80% in 2014. That rapid growth has led dealers to focus on PCP renewals as one of the main methods for keeping customers within the network and within the brand.
Contacting a customer before the end of their PCP contract has also become an established method of upgrading customers to a newer model or higher trim level, for an increase in their monthly payments. But getting to that sweet spot with some PCP mathematics can be helped with greater cooperation from the dealer’s finance house.
Grant Long, Norfolk Motor Group managing director, said one of his franchises, Kia, had come on “in leaps and bounds” with the way it shares finance information to help dealers over the past three years.
“We didn’t have access to the drill-down on PCP information before, but now it’s all online and Kia Finance even keeps us on our toes because they know if we haven’t logged in. It’s monitored, but it’s in our best interest to look at that information regularly,” he said.
Long acknowledges that some manufacturers can be ‘cloak and dagger’ about sharing PCP data with dealers.
However, Kia sends renewal listing data to Norfolk Motor Group on customers that have taken out PCPs and it allows the group’s sale teams to accurately calculate when to contact customers about renewing.
“It’s just a Neanderthal mindset. You’d think sharing data to increase renewal rates would be a no-brainer” James Tew, iVendi
“Some manufacturers and finance houses have been slower to the party on PCP and I think we’re still seeing some of them playing catch-up,” he said.
“Whether they’ll share the information with you really depends on what franchise you have.”
James Tew, iVendi chief executive, believes the UK is lagging behind the US when it comes to PCP renewals and again, it comes down to sharing data.
“Dealers are a lot more proactive over there and there’s a greater link between the finance providers and the dealers,” he said. “The manufacturer finance houses could be doing a better job in the UK of communicating that data about customers and dealers should be asking for that information.”
If better data can help register more cars, why aren’t certain manufacturers sharing what they have with dealerships?
Tew said: “Sometimes it’s just a Neanderthal mindset. You’d think sharing data with dealerships to increase renewal rates would be a no-brainer, but it’s a bit like manufacturers are staring at fire for the first time.
“If you know the current finance campaigns, you know the customer’s term and the equity in the vehicle, you can talk to them about something positive at the right time.”
Hit the monthly payment sweet spot
But when is the right time to target customers for renewal? Getting the correct monthly payment figure is the first step.
Customers can avoid the final balloon payment on their PCP deal if they hand the car back to the finance company or retailer.
Research by Manheim shows 95% of consumers on a PCP are expected to opt for a new vehicle on another PCP. But that ‘trade-in’ is dependent on there being extra value in the vehicle. If the car is worth more than the guaranteed minimum future value (GMFV) set out at the start of the deal, the customer can use that equity as a deposit on the next car.
According to Manheim, 80% of consumers expect to have up to 10% equity remaining in the vehicle to take into the next contract.
It means dealers need to be on the ball with the data to avoid a situation where customers are reaching the end of the PCP in a “zero equity” situation. A significant element to working out the right figure is knowing a vehicle’s current mileage to determine excess mileage charges and dealers will only know a truly accurate figure if they have been servicing the vehicle.
For Norfolk Motor Group, 21 months has been the ideal time for the majority of customers to change. Depending on dealer systems and finance house data feeds, dealers may need to look at between 25 and 50 variables on the existing car and the potential next car to work out the right number to go to the customer with.
Long said: “In many cases, we’re putting them into the new version of their current model or a higher trim level for either the same price or for a slight increase in their monthly premium.”
As a rule of thumb, Long says an increase of £30 per month is the cut-off point for a customer to accept as good value, but customers’ circumstances need to be assessed.
For example, if they have just had a child, maybe they’ll want to change the kind of vehicle they’re in. Or perhaps they’ve just had a pay rise or started a new job?
Tew said dealers would have already made the majority of their profit from the finance by year two, so it makes sense to get customers out of vehicles earlier.
Jerry Page, Mercedes-Benz Retail Group finance and insurance director, said: “As an industry, we’ve been a bit schizophrenic with customer retention. I think we’ve woken up to it a bit late.
“True customer retention is helping customers do what they want to do, not asking them what they want to buy.”
Page said PCP renewal requires some joined-up thinking. “We should be setting out the agenda for the next PCP at the start of the first one,” he said.
“We also have to be prepared to contact customers throughout their PCP term to ask them if everything is OK. We don’t do that enough as an industry.
“We need to invest more time and more people into talking to customers to get to know where they are in the purchase cycle, building that rapport. We’re used to measuring satisfaction at the point of sale, but what about the mid-point?”
Avoid nasty surprises
Dealers also need to make sure customers are aware of any restrictions on their PCP deal. It’s all too easy for a customer to walk away thinking they own the car, but until they pay off the balloon payment, they are effectively leasing the vehicle.
Page believes there should be more communication with PCP customers about how they’re getting on, not just to contact when they might be ready to renew.
Page said: “Do customers understand the mileage restrictions? We can adjust for that if they know they’re going to go over, but the communication has got to be there.
“If the customer wants to change their deal, let them do it, but we need to make regular contact regardless. Catch the problem before it becomes a problem. Ending a deal with excess mileage charges will leave a nasty taste in the mouth.”
Market dynamics are changing
Being able to talk to customers about a renewal with an acceptable cost can also be dependant on the volume of the cars in the market and the impact residual values are having.
John Hughes, Mann Island Finance director, said: “Dealers are under pressure to maintain new car sales momentum, but the dynamics of the market are changing.
“Recycling existing PCP customers earlier in their agreement will become more complex because of the increase of used car supply into the market, which is starting to place downward pressure on residual values (RVs).”
Hughes believes the wider EU increase in new car sales will also dilute some of the financial support from manufacturers on UK PCPs.
Grant Thornton research shows 40% of PCPs are changed around the two-year mark.
Richard Parkin, Grant Thornton automotive sector specialist and former Glass’s head of valuations, said an expected drop in RVs of up to 15% could make it more difficult for dealers to calculate a tempting renewal deal in the future.
Falling RVs, coupled with rising guaranteed minimum future value figures, will reduce equity in a customer’s car and make it more difficult to renew early. Lack of equity or even negative equity at the end of a PCP could force lenders to extend contracts and the replacement cycle.
Black Horse’s top tips for PCP retention
■ Dealers should understand when in the agreement lifecycle the customer is likely to settle their loan
■ Help the customer to understand when they have equity in the vehicle
■ Understand the customer base, attitudes, wants and needs, through tools such as segmentation and profiling
■ Work with the finance provider to find the right point to contact the customer and to leverage their knowledge and expertise
■ Keep a constant dialogue with the customer through a structured contact programme designed to contact the customer at key points such as loan anniversaries as well as likely settlement points