Customer retention programmes in the automotive … · Customer retention programmes in the automotive industry Challenges for automobile manufacturers October 2002

Customer retention programmes in the automotive industry Challenges for automobile manufacturers

October 2002

Mercer Management Consulting © 2002 1

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


! 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

Customer retention programmes in the automotive industryTable of contents


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

Customer retentionDefinition of customer retention / customer retention programmes


American Airlines / British Airways (1981)

1980 1990 2000

Lufthansa (1993)

Source: Mercer analysis; *) programme was abandoned in 1998

Holiday Inn (1983)

Mobil (1991)

GM(1992)

Ford(1993)*

Tesco(1992)

Mercedes Benz (1992)

VW (1995)

Air Miles(1981)

Payback(2000)

Centrica(1998)

Webmiles(1993)

Diners (1985)

Amex (1991)

UBS (1994)

Bank Austria(1996)

KarstadtQuelle(1994)

BA / Air Miles(1991)

Carrefour(1989)

Migros(1997)

Maritim(1996)

Hyatt (1988)

A history of customer retention programmesAnglo-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

Credit cards / banks

Commerce

Energy

Airlines

Automobile manufacturers

Various industrial sectors


Company-specific

programmes

Privilege programme

! Participation of companies from different industry sectors in one programme

! Broad range of reward possibilities

! Programme of one dominant company

! Extension of programme rewards through partnerships

! In addition to privilege programme:Point-earning system (Earn)Attractive rewards (Burn)

→ Reward programme→ Discount programme

! In addition to point-earning programme: status system for top clients (VIP club / gold card)

! Exclusive privileges and services based on programme membership

Scop

e of

rew

ards

High

Low

Auto-mobile manu-

facturers

Hotel chains

Commerce

EnergyCredit cards / banks

Airlines

Types of customer retention programmesToday, customer retention programmes can be classified with respect to the dimensions: scope of rewards and partner companies involved

Programmes extending over

several companies

Point-earning programme

Statusprogramme


Point-earning programme:

Status programme:

Privilege programme:

Status systems

! 2-step status system: Frequent Flyer & Senator

! Exclusive benefits:– Separate check-in– Lounges– Booking guarantee– No expiration of

collected points– ...

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

Collection

! “Miles” for each trip and shopping in the Sky-Shop

! Reward catalogue with >100 rewards

– Free flights / upgrades– Luxury goods– Trips– ...

Privileges

! Check-in by telephone! Credit card function! Insurance services! Events

! 3% discount on all purchases (€ 1 = 3 points)

! Reward catalogue with >30 rewards for:

– Merchandises– Trips– Musical events– Household goods– ...

! Ticket hotline! Credit card function! Calling card*! Free parking

! Credit card function! Ticket service! Club travelling! Mercedes Card Journal

*) telephone card function


! Increase number of customers

– Win over new customers from competition

– Get new customers interested in the product

! Customer retention programmes as an incentive

! Increase profitability / revenue per existing customer

– Increase customer spending for existing products

– Sell other / more products

– Migration to high-margin products

! Retain existing customers over time

– Avoid migration to competitors

Acquisition of new customers

Customer development Customer loyalty

High relevance for automobile manufacturers

Goals of customer retention programmes

High relevance for automobile manufacturers

Average relevance for automobile manufacturers

Superior goalsThe main goals of reward programmes are to acquire new customers and to improve customer retention

Source: Mercer analysis

Customer retention








Challenges

Challenges / potential benefits of customer retention programmesCustomer retention programmes are a response to the following five challenges that face the automotive industry

Benefits:customer retention programmes ...

1. Traditional automobile manufacturing is facing decreasing margins. Profits are realised with downstream activities (After Sales)

… 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


0%

2%

4%

6%

8%

10%

12%

0% 20% 40% 60% 80% 100%

Challenge #1:Traditional automobile manufacturing faces declining marginsProfits are generated with downstream activities (After Sales)

Challenge: profitability The European automotive sector’s profits amount to approx. € 36 bn -76% of profits are generated by the downstream business

1

Profit Potential Europe 2000 (bn €): ΣΣΣΣ 35.8

Rental0.5

Spareparts4.8

Service &Repair

2.8

Fleet2.0

Tier 16.0

Manufacturer2.7

New cars3.4

Used cars3.1

Financing3.8

Leasing2.7 Insurance

4.0Segment profit level(operating profit in % of revenue)

ΣΣΣΣ 8.7 ΣΣΣΣ 27.1

Relative segment size(revenues)

Sources (excerpt): Eurostat, RMI, CNPA, Sessi, Journal l’Argus, Market Line, Datastream, Factiva, Journal de l’Automobile, BVRLA, GOV, expert Interviews, Mercer Research & Analysis


Competitive environment (After Sales) 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

Financing / administration

Aftermarket / service

Services

•Deutsche Bank•Dresdner Bank•Commerzbank

OEM

! Unger! D&W! Stahlgruber

! ADAC! Dekra! TÜV

! ATU! Pit Stop! KwikFit

! ALD! LHS

! AKB-Bank! CC-Bank! Allbank

! Allianz! Axa! Garanta! Car

Garantie! Sixt Leasing! Hertz! AVIS! Europcar! Alamo ! Sixt fleet management

! AVIS fleet management! DB fleet management ! Volkswagen fleet management

Challenge: competitive environmentOEMs are facing increasing competition in the After Sales services market - especially by specialised players

2

Challenge #2:Highly competitive environment in the downstream business


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

3

Brand loyalty 2000 in Germany Consequences of weak customer loyalty

95%88%

56%45%

0%

100%

New car buyers Used car buyers

Source: DAT, Uni Mainz

! 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

– Special offers at dealer outlets

– Interesting, recently launched (niche) models

– Higher customer demands that dealers / OEMs are unable to satisfy

– ...

Intend to buy currentmodel / brand again

Actually do buy current model / brand again

Challenge #3:Increasing willingness of customers to switch


Challenge: customer contact frequencyThe 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

Purchasingfrequency

Revenue per purchase

high

low

low high

Food

Media

Chemist Fashion

Travel

Hotel

Property

Car (OEM)

Approx. 180 contacts / year1)

Approx. 0.2 contacts / year2)

4

1) Assumption: Ø Purchasing transaction once every 2 days2) Assumption: Ø Purchasing transaction once every 5 years

Industry sector comparison of customer contacts

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 #4Customer contact frequency by OEMs too low


Challenge: customer information OEMs only have very little customer data because dealers act as a filter

5

Conflict: “owner” of customer dataOEM ↔ Dealer

CustomerOEM 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

Challenge #5:OEMs have little quantitative and qualitative customer data


Revenue per customer

Carpur-

chase

Carpur-

chase

Carpur-

chase

Inspection

TuningOil

Carpur-

chase

Inspection

Inspection

Repair

Inspection

Tyres

Winterinspection

Revenue per customer

Time Time

Brake inspectionAcce-

ssoriesAdditional revenue per customer generated by customer retention

RepairNew car purchase every 4-5 years

Possibilities to earn points

Tailored, special offers

VIP service

Financial implications of customer retention programmesA successful customer retention programme design has positive financial implications

With a customer retention programmeWithout a customer retention programme

Rare utilisation of After Sales services After Sales service incentives generate additional revenues

Exhaust pipe








Rewards offered by OEM

Reward offered by partner vendors

Privileges for programme members

Possibilities to earn points

Status concept / reward possibilities

(e.g. gold club)

Washing

Inspection

Car rental

InsuranceWinter inspection

Tyres

Petrol

Guarantee

Routingservice

Credit card

Mobile telecommunications

Exclusive events

Internet

Emergency service

TravelMagazine

Accessories /add-on products

Tuning

Repair

Driverservice

24-hours emergency aidVIP lounges

Pick-up service

LeasingShopping

Financing

Sports

Repositioning customer retention programmesReward programmes can include numerous reward possibilities – some of which should be offered together with partner vendors


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

Status quo:OEM programmes

Repositioning of customer retention programmesMercer formulates eight recommendations for successfully repositioning existing customer retention programmes

Repositioning of existing customer retention programmes

Privilegeprogramme

Point-earningprogramme

Statusprogramme

Programmes extending over

several companies

Company-specificprogramme








Design of customer retention programmes for OEMsSeveral elements in the automotive industry can have an impact on the design of customer retention programmes

! Luxury brand! Premium brand! …

! Family! Trade (e.g. taxi)! Sporty singles! Businessman / commuter! …

Automotive brand

! Upper car segment! Midsize car segment! Volume car segment! Compact car segment! Micro car segment! small car segment! …

Car segment

! Global! European! National! Regional! …

Region

! Sedan! Coupé! Off-Road! Pick up! Sports car! Convertible! Roadster! …

Vehicle type

Customer group

Documents

Customer retention programmes in the automotive … · Customer retention programmes in the automotive industry Challenges for automobile manufacturers October 2002