October 2002 Customer retention programmes in the automotive industry Challenges for automobile manufacturers
Summary! In an extensive study, Mercer Management Consulting analysed 50 customer retention programmes, including 10 programmes by automobile manufacturers! The results are as follows:! All existing customer retention programmes by automobile manufacturers (OEMs) can be greatly improved as they are not fully exploiting the customer retention potential! Customer retention programmes help OEMs address current challenges! Customer retention programmes provide clear financial advantages! The strategic goals must be! to design a programme that is specifically tailored to the company,! to integrate attractive partner companies and! to offer multiple possibilities to earn points! Mercer has identified eight distinct parameters which must be addressed in order to design a successful customer retention programme! Each OEM must develop a specific customer programme that targets the different brands / customer segments Mercer Management Consulting 2002 1
Customer retention programmes in the automotive industry Table of contents! Overview and goals of customer retention programmes! Advantages of customer retention programmes in the automotive industry! Status quo of existing customer retention programmes and recommendations for automobile manufacturers! Detailed business designs for customer retention programmes in the automotive industry Mercer Management Consulting 2002 2
Customer retention Definition of customer retention / customer retention programmes Customer retention: The goal of customer retention is to create incentives for customers to make repeat purchases and to discourage the customer from switching to a competitor Customer retention programme: A successful customer retention programme should achieve customer loyalty through such incentives, thus creating a long-term relationship between the customer and the company Mercer Management Consulting 2002 3
A history of customer retention programmes Anglo-American Airlines and hotel chains were the pioneers in customer retention programmes - in the 90 s, customer retention programmes began to appear in the automotive industry Airlines American Airlines / British Airways (1981) BA / Air Miles (1991) Lufthansa (1993) Credit cards / banks Holiday Inn (1983) Hyatt (1988) Maritim (1996) Commerce Diners (1985) Amex (1991) UBS (1994) Bank Austria (1996) Energy Carrefour (1989) Tesco (1992) KarstadtQuelle (1994) Migros (1997) Airlines Mobil (1991) Centrica (1998) Automobile manufacturers Mercedes Benz (1992) GM (1992) Ford (1993)* VW (1995) Various industrial sectors Air Miles (1981) Webmiles (1993) Payback (2000) 1980 1990 2000 Source: Mercer analysis; *) programme was abandoned in 1998 Mercer Management Consulting 2002 4
Types of customer retention programmes Today, customer retention programmes can be classified with respect to the dimensions: scope of rewards and partner companies involved High Scope of rewards Hotel chains Credit cards / banks Airlines Commerce Energy Status programme Point-earning programme! In addition to point-earning programme: status system for top clients (VIP club / gold card)! In addition to privilege programme: Point-earning system (Earn) Attractive rewards (Burn) Reward programme Discount programme Low Automobile manufacturers Privilege programme! Exclusive privileges and services based on programme membership Companyspecific programmes Programmes extending over several companies! Programme of one dominant company! Extension of programme rewards through partnerships! Participation of companies from different industry sectors in one programme! Broad range of reward possibilities Mercer Management Consulting 2002 5
Types of customer retention programmes Privilege, point-earning and status programmes clearly differ in terms of reward possibilities. These differences have an impact on the benefit for the customer Privileges Collection Status systems Status programme: Point-earning programme: Privilege programme:! Check-in by telephone! Credit card function! Insurance services! Events! Ticket hotline! Credit card function! Calling card*! Free parking! Credit card function! Ticket service! Club travelling! Miles for each trip and shopping in the Sky-Shop! Reward catalogue with >100 rewards Free flights / upgrades Luxury goods Trips...! 3% discount on all purchases ( 1 = 3 points)! Reward catalogue with >30 rewards for: Merchandises Trips Musical events Household goods...! 2-step status system: Frequent Flyer & Senator! Exclusive benefits: Separate check-in Lounges Booking guarantee No expiration of collected points...! Mercedes Card Journal *) telephone card function Mercer Management Consulting 2002 6
Superior goals The main goals of reward programmes are to acquire new customers and to improve customer retention Goals of customer retention programmes Acquisition of new customers Customer retention! Increase number of customers Win over new customers from competition Get new customers interested in the product! Customer retention programmes as an incentive Customer development! Increase profitability / revenue per existing customer Increase customer spending for existing products Sell other / more products Migration to high-margin products Customer loyalty! Retain existing customers over time Avoid migration to competitors Average relevance for automobile manufacturers Source: Mercer analysis High relevance for automobile manufacturers High relevance for automobile manufacturers Mercer Management Consulting 2002 7
Customer retention programmes in the automotive industry Table of contents! Overview and goals of customer retention programmes! Advantages of customer retention programmes in the automotive industry! Status quo of existing customer retention programmes and recommendations for automobile manufacturers! Detailed business designs for customer retention programmes in the automotive industry Mercer Management Consulting 2002 8
Challenges / potential benefits of customer retention programmes Customer retention programmes are a response to the following five challenges that face the automotive industry Challenges 1. Traditional automobile manufacturing is facing decreasing margins. Profits are realised with downstream activities (After Sales) Benefits: customer retention programmes... generate additional revenue in the downstream business 2. The environment in the downstream sector is highly competitive differentiate from competitors 3. Customers are increasingly willing to switch brands discourage customers from switching brands 4. OEMs customer contact frequency is too low increase customer contact frequency 5. OEMs only receive little quantitative and qualitative customer information personalise the customer relationship Mercer Management Consulting 2002 9
1 Challenge: profitability The European automotive sector s profits amount to approx. 36 bn - 76% of profits are generated by the downstream business Profit Potential Europe 2000 (bn ): Σ 35.8 12% Σ 8.7 Σ 27.1 Segment profit level (operating profit in % of revenue) 10% 8% 6% 4% Tier 1 6.0 Financing 3.8 Rental 0.5 Leasing 2.7 Insurance 4.0 Service & Repair 2.8 Spare parts 4.8 Fleet 2.0 2% Manufacturer 2.7 New cars 3.4 Used cars 3.1 0% 0% 20% 40% 60% 80% 100% Challenge #1: Traditional automobile manufacturing faces declining margins Profits are generated with downstream activities (After Sales) Sources (excerpt): Eurostat, RMI, CNPA, Sessi, Journal l Argus, Market Line, Datastream, Factiva, Journal de l Automobile, BVRLA, GOV, expert Interviews, Mercer Research & Analysis Relative segment size (revenues) Mercer Management Consulting 2002 10
2 Challenge: competitive environment OEMs are facing increasing competition in the After Sales services market - especially by specialised players Competitive environment (After Sales) Financing / administration Services Deutsche Bank Dresdner Bank Commerzbank! AKB-Bank! CC-Bank! Allbank! ALD! LHS! Allianz! Axa! Garanta! Car Garantie OEM Aftermarket / service! Unger! D&W! Stahlgruber! ATU! Pit Stop! KwikFit! ADAC! Dekra! TÜV! Sixt Leasing! Hertz! AVIS! Europcar! Alamo! Sixt fleet management! AVIS fleet management! DB fleet management! Volkswagen fleet management OEMs' situation! In all downstream segments, OEMs compete against each other against non-oems / specialised players! OEMs often face cost disadvantages compared to specialised players! Increasing number of national and foreign competitors! Further increase of competition through online players expected (e.g. e-bay, e-sixt, )! Differentiation from competitors more and more difficult Challenge #2: Highly competitive environment in the downstream business Mercer Management Consulting 2002 11
3 Challenge: customer loyalty The brand loyalty for cars in Germany ranges between 45% and 56%. However, loyalty is decreasing. Defection of a customer results in massive revenue losses and high costs for winning the customer back Brand loyalty 2000 in Germany Consequences of weak customer loyalty 100% 95% Intend to buy current model / brand again Actually do buy current model / brand again 88%! The loss of a customer results in revenue losses of up to 300,000 (per household)! It is 5 times more expensive to recover a customer (marketing) than to retain an existing one! Decreasing customer loyalty for all brands due to 56% 45% Special offers at dealer outlets 0% Interesting, recently launched (niche) models New car buyers Used car buyers Higher customer demands that dealers / OEMs are unable to satisfy Challenge #3: Increasing willingness of customers to switch... Source: DAT, Uni Mainz Mercer Management Consulting 2002 12
4 Challenge: customer contact frequency The purchase of a car generates high revenues. However, in contrast to the purchase of everyday products, it usually only takes place once every four to five years high Purchasing frequency low Industry sector comparison of customer contacts Food low Media Chemist Approx. 180 contacts / year 1) Fashion Hotel Travel Car (OEM) Revenue per purchase Approx. 0.2 contacts / year 2) Property high OEMs situation! OEMs: each purchase generates high revenue. Problem: low purchasing frequency (every 4-5 years), consequently, few customer contacts! Frequency of inspections / repairs has been decreasing for a number of years: Service revenue per kilometer - 1987: 4.7 Pfg. - 1999: 2.5 Pfg. (identical mileage) On average, vehicles are serviced 1.1 times per year ( frequency is decreasing)! Consequence: Limited customer care Only few possibilities to collect customer data Challenge #4 Customer contact frequency by OEMs too low 1) Assumption: Ø Purchasing transaction once every 2 days 2) Assumption: Ø Purchasing transaction once every 5 years Mercer Management Consulting 2002 13
5 Challenge: customer information OEMs only have very little customer data because dealers act as a filter Conflict: owner of customer data OEM Dealer Data filter Customer data Customer data Situation of OEMs! Important customer data does not get passed on by the dealer (filter)! OEMs only receive little or incomplete data! Consequence: OEMs customer relationships remain largely anonymous Few possibilities for activities tailored to the target group OEM Dealer Customer Challenge #5: OEMs have little quantitative and qualitative customer data Mercer Management Consulting 2002 14
Financial implications of customer retention programmes A successful customer retention programme design has positive financial implications Revenue per customer Without a customer retention programme Revenue per customer With a customer retention programme Car purchase Inspection New car purchase every 4-5 years Repair Inspection Car purchase Additional revenue per customer generated by customer retention Inspection Tuning Tyres Oil Exhaust pipe Accessories Winter inspection VIP service Repair Inspection Brake inspection Tailored, special offers Possibilities to earn points Car purchase Time Rare utilisation of After Sales services Car purchase Time After Sales service incentives generate additional revenues Mercer Management Consulting 2002 15
Customer retention programmes in the automotive industry Table of contents! Overview and goals of customer retention programmes! Advantages of customer retention programmes in the automotive industry! Status quo of existing customer retention programmes and recommendations for automobile manufacturers! Detailed business designs for customer retention programmes in the automotive industry Mercer Management Consulting 2002 16
Repositioning customer retention programmes Reward programmes can include numerous reward possibilities some of which should be offered together with partner vendors Status concept / reward possibilities (e.g. gold club) VIP lounges Driver service Pick-up service 24-hours emergency aid Exclusive events Possibilities to earn points Privileges for programme members Accessories / add-on products Repair Washing Tyres Guarantee Winter inspection Inspection Emergency service Leasing Tuning Routing service Rewards offered by OEM Financing Car rental Petrol Credit card Mobile telecommunications Magazine Insurance Internet Shopping Sports Travel Reward offered by partner vendors Mercer Management Consulting 2002 17
Repositioning of customer retention programmes Mercer formulates eight recommendations for successfully repositioning existing customer retention programmes Status programme Point-earning programme Privilege programme Repositioning of existing customer retention programmes Status quo: OEM programmes Company-specific programme Programmes extending over several companies 1. Positioning of programme: Company-specific status programme 2. Partner portfolio: Extending over several industries 3. Branding: Focus on company brand 4. Customer focus: Target segment 5. Collection logic (earn): Point collection possible 6. Rewards (burn): Rewards 7. Customer services: Across programmes 8. Customer data: Integrated customer data management Mercer Management Consulting 2002 18
Customer retention programmes in the automotive industry Table of contents! Overview and goals of customer retention programmes! Advantages of customer retention programmes in the automotive industry! Status quo of existing customer retention programmes and recommendations for automobile manufacturers! Detailed business designs for customer retention programmes in the automotive industry Mercer Management Consulting 2002 19
Design of customer retention programmes for OEMs Several elements in the automotive industry can have an impact on the design of customer retention programmes Customer group Automotive brand! Luxury brand! Premium brand!! Family! Trade (e.g. taxi)! Sporty singles! Businessman / commuter! Car segment! Upper car segment! Midsize car segment! Volume car segment! Compact car segment! Micro car segment! small car segment! Region Vehicle type! Global! European! National! Regional!! Sedan! Coupé! Off-Road! Pick up! Sports car! Convertible! Roadster! Mercer Management Consulting 2002 20