The psychology of CPO
Sloan and Tyler are sitting with the salesperson at the dealership contemplating whether to buy that 2012 Scion.
While Tyler is ready to agree to the terms, Sloan is worried about what’ll happen if the vehicle breaks down suddenly and she is stuck on the side of the highway. They both work and are making ends meet, but barely.
This is a big purchase and a big decision. With so many “what ifs,” Sloan needs reassurances of the vehicle’s safety and reliability as well as assurances that they can afford to maintain their current lifestyle in the case of unexpected mechanical breakdown.
The salesperson tells the couple about the certification on the vehicle and the details of the warranty that is included, and that it has been through a rigorous inspection and has passed on all points. Sloan agrees and the couple happily drive off in their new purchase. Sloan and Tyler are typical of today’s auto buyer.
By now, most dealerships know the “whats” about certified pre-owned (CPO) programs. Today, we’ll talk about the psychology behind why consumers consider and buy CPO vehicles.
Understanding the psychology behind consumer decision-making allows you to have the ability to predict and solve problems early and reliably. It allows you to create a strategy for your business that sets you apart from your competitors.
Before we get into the psychology of the CPO buyer, let’s take a quick look at the basics behind CPO and the attached warranty.
If a company is selling an extended warranty on a vehicle for $500, then that means the company is betting that over an extended period of time and considering the law of big numbers (thousands of consumers), that it will pay out less than $500 per repair expense. There may be some repair bills that cost more than $500, or even several thousand dollars, but on average, the repair bills will be less than $500 per car.
Next we look at the consumer’s point of view. If they are buying a $20,000 automobile, it might give them reliable service throughout the lifetime that they own it, or it might be a lemon. In their mind, there’s no way of knowing which way it will go, but the consumer hopes it will be a good vehicle. But they’d like to protect themselves against getting a lemon.
This is where the psychology comes in. People are different in how they perceive risks. Some people are “risk averse” — that is, they don’t like to take risks. They would rather pay a little more to know that they are covered against a big loss. To risk-averse people, paying $500 to know that they won’t have to pay $1,000-$2,000 for a major repair just makes sense to them.
However, other people are risk-takers. They are willing to take risks. To them, they’d rather save the $500 and take a chance that the car will be just fine. If there is a big repair bill down the road, they’ll deal with that when the time comes.
Either way, consumers want to be sure they can maintain their current standard of living. Common questions they ask themselves are, “How will I handle a large repair bill if something happens?” or “Without this coverage, will I leave myself and family in debt?”
In “Components of Perceived Risk in Product Purchase: A Cross-Validation,” an article by Leon Kaplan, George Szybillo and Jacob Jacoby, the authors found that risk associated with consumer purchases include dimensions of performance (desire for a warranty), financial (the security to budget how much they can afford), psychological, social, convenience loss and physical risk.
A certified vehicle addresses many of these areas: performance risk (will it work properly?), financial risk (can I afford to pay for repairs?), social (can I get more car than I thought if I don’t have to plan to pay for major repairs? Or can I be put into more car with favorable loan rates, better debt-to-income ratios or higher advance?), and convenience loss (how much time, convenience and effort will be required if the vehicle or parts fail?).
We know now that consumers are concerned about the possibility and consequence of breakdown. They’re concerned about the safety and security of their purchase and they need to have trust with the dealership.
How can we best leverage consumer psychology?
Looking at a recent Autotrader consumer survey, 82 percent of consumers have positive feelings about certified vehicles. Almost two in three want the peace of mind that comes with a certified vehicle, which means that the vast majority of consumers today are risk-averse. And, of shoppers surveyed, two out of three are willing to pay a premium for these vehicles!
Consumers are concerned about the safety and reliability of their vehicles, and even more concerned about being able to maintain their standard of living in case of a large or catastrophic repair bill. The Autotrader study shows that they are willing to pay more than $2,000 extra for the benefits CPO vehicles provide.
With a certified vehicle, consumers are protected from the negative financial impact of a costly mechanical breakdown. Consumers can utilize the warranty attached to the certification to cover the cost of the mechanical repair with a small deductible, assuring that they aren’t hit with a repair bill that could financially set them back several months or more and adversely change their lifestyle.
The final piece of the equation is that consumers who are attracted to CPO vehicles purchase vehicle service contracts (VSC) more often than those who are less risk averse. In fact, an industry study shows that CPO buyers purchase VSCs 15 percent more often than non-CPO buyers.
In today’s price-compressed marketplace, front-end profits are dropping. Sales of vehicle service contracts offer high profit margins and present a win-win scenario with a consumer who is risk-averse or one who has experienced prior loss. Understanding the psychology of the CPO buyer will help build more profitable relationships for your dealership.
How many Sloans and Tylers do you have coming into your dealership or looking at your virtual inventory? Are they seeing what they need: the trust, safety and security provided by today’s CPO programs? Fill these needs and they will be happily driving off of your lot with their purchase!
To learn more about CPO and to see the top-rated CPO programs, according to Autotrader, visit www.autotrader.com/cpo.
Rob Christman is the fixed operations director of sales at Cox Automotive.