Automotive Loyalty Suffers With Model Termination, According To Polk

Study finds OEM defection rate of 55 percent among owners of models terminated; OEMs, dealers and advertising agencies must devote significant resources to mitigate potential customer defection

SOUTHFIELD, Mich., March 10 -- OEMs considering brand or model termination as part of their restructuring plans must take into careful consideration the potential future purchase decisions of those customers affected by a terminated brand, according to a report issued today by R. L. Polk & Co.

A complete copy of the report is available for download at: http://www.polk.com/TL/MS_200903_AutoIndustryCustomerLoyalty.pdf

"Traditionally, 45 percent of consumers remain loyal to a given brand when they return to market to purchase a new vehicle," said Carlos Mora, senior solutions consultant with Polk and a co-author of the report. "However, this standard rate of loyalty suffers when a manufacturer decides to terminate a model or brand."

As part of the study, Polk analyzed repurchase and defection rates of customers returning to market in the first quarter of 2008 that had owned one of 120 models that had been terminated prior to returning to market for a new purchase. Industrywide, Polk found the corporate defection rate for this group is 55 percent, eight percentage points higher than the 47 percent corporate rate of defection for all owners of vehicles made by the same the same division.

Impact on Loyalty Varies by Segment

Compact car owners have the highest rate of defection from their manufacturer at 12.7 percent, which may be attributed to the large variety of models and brands available in the segment (Figure 1). Additionally, termination of large cars and pickup models has an almost negligible impact on customer loyalty to the manufacturer. This is based on a number of potential factors.

"Pickup truck and large car owners are traditionally among the most loyal when returning to market," said Dan Zetu, analytic consultant at Polk and co-author of the report. "When large cars and pickup trucks are terminated, OEMs generally replace them in their product lineup with an equivalent vehicle," he continued. "Furthermore, pickups and large cars tend to hold their resale values much better than compact cars."

As part of its analysis, Polk conducted a consumer poll in the U.S. market as well. Insights from the poll show that slightly more than half of consumers would not buy a new vehicle from a manufacturer that was rumored to be discontinuing the brand they currently owned.

Financial Impact of Defection

Polk also studied the implications of model terminations of the Chrysler Pacifica and Chevrolet Cavalier. The termination of the Chrysler Pacifica was announced in Nov. 2007. During two separate time periods (Oct. 2006 to Sept. 2007 and Oct. 2007 to Oct. 2008), the level of defection to the Honda Pilot rose nearly 19 percent. When the Ford Edge was introduced, the average number of Pacifica owners that defected to it rose by 50 percent. Together with other defections to competing manufacturers, these defections represent approximately $14 million in lost revenue realized by Chrysler.

GM terminated the Chevrolet Cavalier in September 2004 and launched the Chevrolet Cobalt as a replacement vehicle in 2004, as a 2005 model year vehicle. Even years after the popular Cavalier was terminated, previous owners of the model show higher rates of defection from GM than owners of all Chevrolet brands. Not engaging these owners with Cobalt or another GM vehicle resulted in GM losing millions in potential sales.

Model Termination Negatively Affects Loyalty

There are many contributing factors to the loss of loyalty due to model termination. These include decreasing residual values and consumer concern over the availability of parts, including technician training on service or repairs on vehicles that are no longer priorities for the manufacturer.

The manner in which dealers and OEMs handle the planned termination process also has a substantial impact on loyalty. With planned termination of entire brands and models, the need to communicate with owners becomes even more critical to avoid a sense of neglect among consumers, which may result in them taking their business elsewhere.

Focus on Reducing Customer Defection

Manufacturers and dealers, together with their advertising agencies, can take steps to mitigate customer defection. Areas of significant opportunity for OEMs include proactive communication with their dealers and consumers about vehicle terminations. This can be done as part of a comprehensive retention strategy to build loyalty and promote other vehicles in their lineup for consideration. This focus on customer relations can have a positive impact on loyalty and dealer satisfaction rates.

At the dealer level, sales personnel should be trained to help lead consumers to purchasing a replacement vehicle as part of an owner retention strategy. With vehicle termination, the opportunity to reach out to customers with a comprehensive retention plan is essential to retain valuable customers and should be considered. Advertising agencies should be counseling their clients by proposing and developing aggressive communications strategies to thwart defections, timed to coincide with the model termination announcement.

About R. L. Polk & Co.

R. L. Polk & Co. is the premier provider of automotive information and marketing solutions. Polk collects and interprets global data, and provides extensive automotive business expertise to help customers understand their market position, identify trends, build brand loyalty, conquest new business and gain a competitive advantage. Polk helps automotive manufacturers and dealers, automotive aftermarket companies, finance and insurance companies, advertising agencies, media companies, consulting organizations, government agencies and market research firms make good business decisions. A privately held global firm, Polk is based in Southfield, Mich. with operations in Australia, Canada, China, France, Germany, Japan, Spain, the United Kingdom and the United States. For more information, please visit www.polk.com.

  Figure 1: Impact on Manufacturer Defection Rates by Vehicle Segment

  Vehicle Segment                  Increase in Defection Rates -- Owners
                                   of Terminated Models vs. Owners of
                                   All Vehicles in the Brand

  Compact cars                     +12.7 percent
  Minivans                         +11.9 percent
  SUVs                             +9.1 percent
  Sports cars                      +8.2 percent
  Midsize cars                     +7.3 percent
  Luxury cars                      +5.9 percent
  Large cars                       Negligible impact
  Pickups                          Negligible impact

This table shows the impact on defection rates associated with the elimination of vehicles in different segments. This is measured but the increase in defection rates from the OEM for owners of terminated models vs. owners of all vehicles in the brand.

NOTE TO EDITORS: Interviews with the authors of this report are available. Please contact Michelle Culver at 248-362-4200 ext, 295 to arrange.