I have noticed that several car brands in Australia have been offering free service with the purchase of a new car. Other brands have done it before and I am not surprised that they no longer do.
We have mostly seen free service introduced as an emergency solution to try and automatically overcome the perceived objection of ‘service costs’. Generally ‘free service’ promotions end up creating more work than they aim to save.
In training programmes, we show salespeople how to address customer objections about service costs without throwing money away or playing Three Card Monte with whatever ‘discount’ they have for customers.
Some manufacturers we have worked with have needed convincing as to why free service is such a bad idea for their business and the business of their dealers. Here’s a summary of the Top 20 problems we have identified with promoting periods of ‘free service’ to try and sell new cars.
1. There’s a Pretty Good Chance That Your Customers May Not be That Ignorant
Most customers know that when a car manufacturer offers something ‘free’ that the cost of it is simply hidden elsewhere. They know that the reason you offered them $3,000 less on their trade-in than they were offered on competitors’ cars is because that $3,000 is subsidising their ‘free’ service costs for the next three years. Most of us know there’s plenty of free cheese in a mousetrap. In the main, manufacturers aren’t fooling customers. Are they fooling themselves?
2. Free Servicing Teaches Customers that Service is Worth Nothing
Including a significant period (e.g., a year or more) of free service conditions customers to believe that servicing is worth nothing. The longer the free service period, the more damage is done to the customer’s perception of the dollar value of service provision.
3. Free Servicing Sets a Dangerous Precedent
After sustained periods of free service, when customers come to trade-in, they expect free service again. Actions speak louder than words so even though you have explained (verbally and in writing) that the free service is for a defined period, the manufacturer has conditioned customers to expect it, so when the free service offer expires, many customers interpret this as a painful experience.
4. Free Service Increases ‘Dumping’ Which Hurts Resale Values, Which Affects New Car Sales
When the free service period is over, more customers are likely, and induced to sell their car because service costs them money from this point on. This is the ‘same’ service that has cost them nothing up to this point so why should they now pay for it? Whether or not manufacturers and/or dealers actually seek to recoup some of the profit lost during the free service period by slightly increasing service costs afterward, many customers now see this paid servicing as too costly and perhaps even as the dealer trying to take advantage of them. Many customers then decide to sell the car and get a new car. Notably, this would include customers who would otherwise have kept their car longer. With more of the brand’s cars coming onto the used car market faster and earlier in their life, and with service that now costs and was previously free there is less demand for the cars second-hand and greater supply which pushes resale values down. A reputation for poor resale can then affect new car sales with wary new car buyers seeking a safer resale bet.
5. Free Servicing Reduces Service Profitability
Some manufacturers claim improved service retention levels on new cars with free servicing. But at what cost? None that I have spoken with have claimed a 100% service retention rate – not even close. So it’s not all about the price. They can congratulate themselves on pricing their service so that it cannot be beaten by franchised non-dealer service centres or a local garage mechanic, but if they have sacrificed most of their own and their dealers’ profitability to achieve this, what’s the point? If service retention rates were low enough for ‘competitors’ like Ultratune and others to be a major concern then the problem is probably not the price.
6. Reduced Service Profitability Affects The Business in Other Ways
To operate on forced lower profitability, some dealers may start cutting corners to reduce costs. They may be tempted to use cheaper oils, reduce the level or quality of service provided. In a time when the retail motor industry in Australia is losing capable, experienced technicians to the high-paying mining industry, reduced profitability also reduces a dealership’s ability to keep pay levels competitive for good technicians.
7. Don’t Pay for What You’re Already Getting
Several brands that I have seen employ the ‘free service’ idea already had industry-leading service retention and brand loyalty. So a large proportion of their customers were loyal repeat customers both in sales and service. The manufacturers were already getting that business. They provided a ‘free service’ offer that cost the manufacturer, say $2,500 per vehicle. The manufacturer has just paid those customers $2,500 each to do what they were going to do anyway!
They have taken customers who valued the certainty provided by their brand experience and re-educated them to value money-throwing offers, increasing the susceptibility of those customers to be lured away to other money-throwing brands. A story of a goose and a golden egg comes to mind.
8. Alienates Customers Who Bought Before the Program
Customers who bought your product in the months (perhaps up to a year) before you offered ‘free service’ are likely to feel that they have missed out. Some will even believe they were tricked into buying the car before the promotion began. Naturally it follows that a percentage of customers make requests to dealers and manufacturers for some ‘compensation’. Sometimes they get it. So in those instances, manufacturers and/or dealers are yet again paying even more for a customer they already had.
On occasion, we have even been asked to advise on helping manufacturers clean up the mess created by this situation.
9. Unrealistic Expectations from Customers of What is Covered by Free Service.
Manufacturers who offer free service will publish disclaimers and conditions that are best understood by two groups of people:
- People who work in the industry
- Customers who know enough about service to pay for it in the first place
The target markets for free service offers are people who are ignorant of servicing and as such, can’t appreciate the value for money that service offers. In the same action that you take to attract those people, you put in disclaimers and exclusions that those people are not likely to understand.
So customers who do not understand service and the definition of ‘scheduled servicing’ end up expecting (or sometimes pretending to expect) free tyres, brake pads, batteries, wiper blades, etc. Even if they are not then given free of charge, there is a significant amount of time and energy that can be wasted by service advisors having to explain to customers that their latest need is not covered under the free service arrangement.
10. Removes an Important Indicator of Quality of Service
Price is an important indicator of quality. For example, a new Tag Heuer watch may cost $3,000. A fake copy of that Tag Heuer watch may cost $20. The real watch will last better, keep better time. The fake won’t work anywhere near as well. Noone offered a $20 Tag Heuer would believe it was the real thing.
Customers who understand vehicle servicing may be bewildered or disbelieving that their car has been serviced properly for a price as low as low as $0.
As an example, when I worked for Lexus, one of our first customers in Australia was used to service costs of more than $1,000 every time he serviced his other luxury car. A real automotive enthusiast, he had great trouble believing we could possibly have properly serviced his Lexus for less than $400. He thought, at first, that $400 was a rip-off because it was too low! It took some convincing, including him watching his services being performed, for him to see that his car was being properly serviced for less than $400.
So free servicing removes an important indicator of the quality and quantity of work performed and parts used.
11. Increase Resistance to Service Recommendations.
If I am knowingly investing $450 on a service and the dealer calls me during the service and says I need a new pollen filter (for example) and it will cost $45, that price , compared with the cost of the service, is relatively small and increases the chance that I’ll agree to the new filter.
If I am having that same service performed free of charge and the dealer calls on the same $45 pollen filter, that $45 compares very unfavourably with the $0 I am paying for the whole scheduled service. This reduces the chance of me agreeing to the new filter.
This is just one of many examples of how free servicing increases customer resistance to service recommendations.
12. Compound Problems from Customer’s Refusal of Extra Work
Anyone experienced in working in automotive service for a few years would have seen this happen. A customer refuses the service department’s suggestion of extra work. Not having the work done, then causes the customer future problems. In many cases, the customer then blames the service department for the problems caused by the customer refusing the extra work.
For example, a service department may suggest that the $70 set of front brake pads need replacing within the next 1,000 km. The customer decides not to get the work done. Subsequently, the customer forgets to get the work done and the brakes end up going metal to metal and damaging the brake discs, causing a $500 disc machining job. Or worse, the brakes don’t work properly and the customer has an accident. And the customer blames the dealership service department!
13. Dilutes the Effect of Any Dealer Goodwill
In a well-run service department, there are judicial allowances made by the servicing dealer for customer goodwill. These are gestures made by the dealer, at the dealer’s expense, to help a customer in certain situations. As the customer realises that the dealer is paying for something they don’t have to, to help the customer, there is ‘goodwill’ created with that customer.
When there is a culture of free service, any goodwill action taken by the dealer is more likely to be interpreted by the customer as just part of the free deal.
14. Dealers can Become Conditioned to not Provide Goodwill
As a result of point No. 13, dealers can become conditioned to not provide goodwill. Dealers can become cynical about goodwill because its effects have been eroded by ‘free service’ mentality. So they reduce or even stop providing goodwill. This in turn, can harm the service reputation of the dealer and the brand.
15. Can Create a Type of Buyer’s Remorse
Customers who have bought your product previously and spent thousands of dollars on service with you are now getting the same service free. It can make those customers wonder how much they were being ‘overcharged’ previously.
16. Doesn’t Necessarily Alter the Customer’s Perception that Your Service is Expensive (when it’s not free)
Some manufacturers who head down the road of offering ‘free service’ do it to try and address reported customer perceptions that the manufacturer’s service may be expensive. Offering that service for free doesn’t necessarily alter that ‘expensive’ perception – and creates other problems listed on this page.
17. Makes Other Service Offers Redundant
Let’s say a manufacturer offers a three-year free service on new cars. During that period, any service marketing by dealerships to that customer are redundant at best. For example, some dealers promote pre-holiday safety check services. Even though these may be priced extremely keenly to generate more work for the service department, free service customers are likely to either ignore the special or expect it free.
If you give a customer all of your profit in your first offer:
- The customer thinks you must have a lot more to give because noone in business would be so desperate to give their profit away in their first offer.
- You have nowhere left to go in any subsequent negotiation or offers.
18. Hurts Your Dealerships’ Late-Model Used Car Business
Dealerships that sell late model used cars of the same brand will notice that the free service offer on new cars either:
- Diminishes demand for their late model used cars and/or
- Pushes used car prices down to ‘compete’ with the free service offer.
19. Creates Extra Work
The free service programme has to be administered. Usually it has to be coordinated and validated at the manufacturer/distributor office. Often subsidies are paid to the dealer. Of course the dealer also has to process the free service claim and check that the car is within the parameters of the free service agreement. This extra work is generated to give service away free, so the cost of this extra work further diminishes the profitability of service departments.
20. Makes Sales Teams Lazier
New car salespeople should be professionally helping customers to buy – not just new cars, but also the dealership and its service.
Free servicing is a short term strategy that creates significant long term problems for manufacturers, dealers, and most importantly, customers.
Instead of teaching salespeople to sell the dealership and its service and manage them properly, some manufacturers relieve the salespeople of their professional responsibility by offering service free of charge.
It incorrectly teaches salespeople in the affected network, on a large scale, that the way to ‘sell’ something is to just keep making it cheaper.
These are just some of the most obvious problems I have seen caused by free service offers.
I would never advise a client competing in a premium market to run a sustained free service offer. With minimal and dubious short term benefits, it does too much significant long-term damage to your business.
As Mark Twain said; “Nothing astonishes men so much as plain dealing and common sense”.