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GRO: Forecasting Dealer Dollars with Scientific Precision

Posted by Hudsen Smith Friday, September 18, 2015

It’s no secret to you that customer retention is a vital aspect of your business.

After all, the longer a customer is retained, the more visits they make, usually at an increasingly higher value with each visit. And of course, the more often they come to see you, the more your bottom line grows.

The problem is, it’s a neat trick to keep customers coming back, and even more so to keep them coming back on a regular basis.  For most dealerships, customer visits decrease like radiation – on a half-life, meaning the likelihood of an additional visit decreases by half at each visit opportunity.  Keep taking half away and you get close to 0% probability pretty quickly. In fact, a recent DMEautomotive analysis showed the probability of a customer even making it to a 10th service visit is 0.3%.

The absence of retained customers not only costs you in the service lane, but it also impacts the likelihood that they will purchase a vehicle from you again. In fact, only 5.8% of dealer customers even reach the fourth visit, which is crucial for the service-to-sales repurchase rate.

Despite this need for retained customers, many dealers are still utilizing old-school metrics that provide an incomplete picture of their customers’ spending and servicing habits.

Traditional customer retention rate metrics show only an average of the overall dealer customer population, measuring the percentage of customers who return for another service visit within 12-18 months.

The problem many dealers face with classic metrics is: despite reportedly increased retention, service revenue is on the decrease.

Does that sound familiar to you?

Classic metrics are very general, painting all customers with the same brush. But all customers are not alike, nor is their revenue potential. Our research has segmented service customers into three categories:

  • Loyalist: Both visit and spend most at their dealership
  • Swing Loyalist: Visit most or spend most at dealership, but not both
  • Disloyalist: Neither visit nor spend most at their dealership

Additionally, customers behave differently depending on where they lie in the vehicle ownership lifecycle. Higher emphasis is placed on customers early in their vehicle ownership, as they’re more likely to come in for service.

Using these segment measurements and a new, breakthrough concept we call GRO, or Gross Revenue Optimization, dealers can put in place plans that will increase their GRO score, and therefore increase revenue and retention.

GRO is an effective, statistically significant (Adjusted R2 = 82%) model to predict and then measure the future value potential created by changes in retention rates across the customer lifecycle.

GRO starts by understanding the probability that each service visit will occur over 10 service visits.  We call this the GRO Curve and it measures that half-life that we just talked about, and yes it is a depressingly downward sloping curve that you likely won’t believe the first time you see it.

Your GRO score, the measure of how much lifetime value from each customer your store is capturing, is calculated by dividing the realized revenue (the revenue over 10 service visits multiplied by the probability of that visit) by the potential revenue (the total revenue available during their vehicle lifecycle). Proven to be 70% more reliable in predicting service revenue growth, your focus from here on out is to put the plans in place that will increase your GRO score.  Your GRO score is the single metric you need to understand the health of your Fixed Operations.

Early lifecycle customers have a large impact on lifetime value, mid-lifecycle customer have a medium impact and late-lifecycle customers have a low impact. GRO treats early and mid-lifecycle customers with greater weight, due to the potential value they offer a dealership.

Using GRO, you can not only predict service behavior, but also forecast incremental vehicle sales generated through improved customer retention and loyalty.

Yes, you read that correctly.

For the first time ever, your Fixed Operations Manager can make a probable outcome of how many cars you’ll sell, through the application of a statistically significant, more predictive formula.

GRO correctly predicts financial performance of dealers on basis of RO dollars and increase of 4-year repurchase rates, predicting the number of vehicles sold. GRO takes a household approach to fixed operations, which provides the best opportunity to sell additional vehicles.

In a study of GRO’s effect, we found that the 4-year repurchase rate for the targeted range (with an average GRO score of 21%) resulted in 75 more units sold than the majority of dealers (with an average GRO score of 6.2%), by increasing customer retention as measured by GRO.

Some trends are still putting obstacles between dealers and frequent service visits from customers.

Customers are holding on to their cars a little longer these days. The average age of a U.S. vehicle has plateaued at 11.4 years, remaining constant since 2012, but still a marked increase from the two-year average in 2007. These days, cars are simply built to last and, combined with developments like synthetic oil, it’s easier for customers to justify fewer trips to the service lane.

Using the practices that guide you to a better GRO score, you can increase your customers’ presence in your service lane, increase customer retention and, ultimately, keep them coming back to your dealership for their next vehicle purchase.

Want to grow your GRO? We have a few ideas for you.

  1. Make It Easy
    Have an after-hours call service, provide loaner vehicles, complete most services the same day, and allow customers to order parts through the website 
  2. Stay Connected With Customers
    Offer a mobile app, and actively collect and use customer email
  3. Be Transparent On Pricing
    Have prices for common parts and services on your website and provide printed quotes for declined services
  4. Provide Timely and Relevant Savings Opportunities:
    Send seasonal and holiday promotions and mail a declined services reminder with an offer
  5. Encourage Long-Term Relationships
    Enroll all customers in a loyalty program and offer additional maintenance plans
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