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Car Leasing Dealership

Create a Successful Leasing Program at Your Independent Auto Dealership

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13-17 min read

May 07, 2024

Introduction

Independent auto dealerships face increasing competition from larger franchised dealerships and online platforms. However, they offer a unique value proposition with personalized customer service and local community connections. To thrive in the competitive market, independent dealerships must diversify their revenue streams and meet evolving customer expectations.

Benefits of Offering a Leasing Program

1. Increased Customer Options:
Offering leasing alongside traditional buying options attracts a broader customer base, including those seeking lower monthly payments or shorter-term vehicle use.

2. Steady Revenue Stream:
Leasing provides a consistent monthly income, reducing the financial impact of fluctuating vehicle sales.

3. Enhanced Customer Retention and Loyalty:
Leasing encourages repeat business as customers are more likely to return for a new lease when their current term expires.

Purpose of the Article

This guide aims to help independent auto dealerships set up a successful leasing program by providing:

  • Detailed insights into the leasing business model
  • Step-by-step strategies for planning and implementation
  • Best practices for marketing and managing the program
  • Tips for scaling and optimizing leasing operations

Read on to learn how to transform your dealership into a leasing powerhouse.

Understanding the Leasing Business Model

Leasing is an alternative to traditional vehicle purchasing that allows customers to use a vehicle for a fixed term in exchange for monthly payments. Here's a breakdown:

Difference Between Leasing and Buying

  • Leasing:
    • Lower monthly payments
    • No ownership; vehicle must be returned at the end of the lease term
    • Mileage and wear limitations
  • Buying:
    • Higher monthly payments or upfront cost
    • Full ownership once the loan is paid off
    • No mileage or wear limitations

Key Terms to Know

  • Lease Term:
    The length of the lease agreement is typically 24-48 months.

  • Residual Value:
    The residual value is the vehicle's estimated value at the end of the lease term.

  • Capitalized Cost (Cap Cost):
    The Cap Cost is the negotiated price of the vehicle for the lease.

  • Money Factor:
    A lease's interest rate or finance charge is often expressed as a decimal (e.g., 0.0025).

Types of Leasing

1. Closed-End Leases

  • Most common type of lease
  • The customer returns the vehicle at the end of the lease term
  • Excess mileage and wear fees may apply

2. Open-End Leases

  • More common in commercial vehicle leasing
  • The customer may be responsible for the difference between residual value and actual market value at the end of the lease term

Pros and Cons of Leasing for the Customer

Pros

  • Lower Monthly Payments: Leasing typically requires lower payments than financing a purchase.
  • Newer Vehicles: Customers can more frequently drive newer vehicles with the latest features.
  • Warranty Coverage: Leased vehicles often remain under warranty for the entire lease term.

Cons

  • No Ownership: The customer must return the vehicle at the end of the lease term.
  • Mileage Limits: Exceeding mileage limits may result in additional fees.
  • Wear and Tear Fees: Excess wear and tear can lead to extra charges.

Advantages for the Dealership

1. New Revenue Streams
Leasing introduces a steady monthly revenue stream, opening the door for additional services like maintenance packages.

2. Vehicle Return and Resale Opportunities
Returned lease vehicles can be resold as certified pre-owned vehicles, creating a valuable secondary market for the dealership.

Initial Planning and Strategy

Identifying the Target Demographic

  • Define the ideal leasing customer based on location, age, income level, and vehicle preferences.
  • Analyze historical customer data to find patterns in vehicle preferences and leasing interests.

Analyzing Competitors and Their Leasing Programs

  • Study leasing offers from nearby franchised dealerships and online platforms.
  • Identify pricing strategies, lease terms, and marketing tactics used by competitors.

Determining the Potential Market Size and Demand

  • Utilize local and national automotive market data to estimate leasing program demand.
  • Survey current and potential customers about their leasing preferences to learn about demand.

Financial Analysis and Projections

Estimating Initial and Operational Costs

  • Initial Costs:

    • Leasing management software
    • Staff training programs
    • Marketing and promotional materials
    • Legal and compliance consultation
  • Operational Costs:

    • Vehicle depreciation and maintenance
    • Staffing and sales commissions
    • Insurance and licensing fees

Revenue Projections and Break-Even Analysis

  • Project monthly leasing revenue based on expected customer conversion rates.
  • Calculate the break-even point by considering fixed and variable costs.

Determining Profitability and Risk Factors

  • Estimate potential profits by determining residual values, leasing rates, and expenses.
  • Identify risks such as customer defaults, vehicle depreciation, and excess wear fees.

Setting Clear Goals and Objectives

Short-Term and Long-Term Targets

  • Short-Term Targets (6-12 months):

    • Achieve a specific number of new leases per month.
    • Reach a break-even point for initial investment.
    • Build brand recognition for the leasing program.
  • Long-Term Targets (1-3 years):

    • Establish a stable monthly leasing revenue stream.
    • Expand the leasing program to include additional vehicle models.
    • Develop a strong base of repeat leasing customers.

Defining Key Performance Indicators (KPIs)

  • Lease Conversion Rate:
    Percentage of customers choosing leasing over purchasing.

  • Average Lease Term:
    Average duration of leasing contracts (24, 36, 48 months, etc.).

  • Residual Value Accuracy:
    Variance between estimated and actual residual values.

  • Customer Retention Rate:
    Percentage of customers who renew or start a new lease.

Developing the Leasing Program

Structuring Lease Terms and Conditions

Lease Duration (24, 36, 48 months, etc.)

  • Offer a variety of lease terms to accommodate different customer needs.
  • Most popular terms: 24, 36, and 48 months.

Mileage Allowances and Excess Mileage Charges

  • Standard mileage allowances range from 10,000 to 15,000 miles per year.
  • Clearly state excess mileage fees (e.g., $0.15 to $0.25 per mile over the limit).

Early Termination Fees and Penalties

  • Include early termination clauses to protect the dealership from losses.
  • Common penalties: remaining lease payments, vehicle depreciation costs.

Setting Residual Values and Pricing

Determining Depreciation Rates

  • Calculate expected depreciation rates based on historical data and market trends.
  • Account for factors like vehicle model, usage, and demand.

Researching and Setting Competitive Residual Values

  • Study residual values set by competitors and leasing companies.
  • Adjust residual values to be competitive while ensuring profitability.

Establishing Competitive Lease Pricing

  • Calculate monthly lease payments considering depreciation, financing, and operational costs.
  • Set pricing to attract customers while maintaining profitability.

Financing Options and Partnerships

Establishing Partnerships with Leasing Companies and Banks

  • Partner with leasing companies or banks to access their financial products.
  • Evaluate potential partners based on their terms, rates, and customer support.

In-House Financing vs. Third-Party Financing

  • In-House Financing:

    • Greater control over terms and conditions
    • Increased potential profit but higher risk
  • Third-Party Financing:

    • Reduced risk and administrative burden
    • Potential for lower profits due to partner fees

Designing a Lease Agreement Template

Legal Considerations and Compliance

  • Ensure compliance with federal and state leasing regulations.
  • Consult with legal experts to draft comprehensive and compliant lease agreements.

Clauses for Damage, Maintenance, and Insurance

  • Damage Clause: Clearly state penalties for excess wear and tear.
  • Maintenance Clause: Define customer responsibilities for routine maintenance.
  • Insurance Clause: Require customers to maintain adequate insurance coverage.

Building Infrastructure and Resources

Staff Training and Development

Sales Team Training on Leasing vs. Purchasing

  • Educate sales staff on key differences between leasing and purchasing.
  • Provide scripts and FAQs to help salespeople confidently explain leasing benefits.

Understanding Leasing Terms, Customer Education

  • Ensure staff understand terms like residual value, money factor, and cap cost.
  • Develop customer education materials to demystify leasing for potential customers.

Handling Objections and Offering Solutions

  • Train staff to address common customer objections like mileage limits and lack of ownership.
  • Offer solutions such as higher mileage allowances or lease-to-own options.

Leasing Software and Management Systems

Selecting Appropriate Leasing Management Software

  • Choose software that handles lease accounting, customer management, and compliance.
  • Ensure scalability for managing a growing leasing program.

Integrating with Existing Dealership Management Systems

  • Seamlessly connect leasing software with dealership inventory and CRM systems.
  • Enable automated lead tracking and customer follow-ups.

Inventory Tracking and Residual Value Estimation Tools

  • Use software to accurately track leased vehicle inventory.
  • Implement residual value estimation tools to streamline pricing decisions.

Marketing and Promotion Strategies

Creating Promotional Materials and Advertising Campaigns

  • Design eye-catching brochures, banners, and digital ads highlighting lease benefits.
  • Develop targeted campaigns for different customer segments.

Digital Marketing Strategies and SEO for Leasing Programs

  • Optimize the dealership website for leasing-related keywords.
  • Invest in paid search and social media ads targeting potential lease customers.

Community Engagement and Events

  • Sponsor local events and offer leasing program discounts to attendees.
  • Partner with local businesses and organizations to increase community presence.

Managing and Growing the Leasing Program

Monitoring Performance Metrics

Lease Conversions, Customer Retention, Profitability

  • Track lease conversion rates to gauge customer interest in leasing versus purchasing.
  • Monitor customer retention rates and analyze why customers return (or don't) for a new lease.
  • Assess leasing profitability by comparing revenues to operational and financing costs.

KPIs vs. Targets and Adjustments Required

  • Measure KPIs like lease conversion rates, average lease term, and customer retention.
  • Compare actual KPIs with predefined targets to identify areas needing improvement.
  • Make strategic adjustments to pricing, marketing, or lease terms to meet targets.

Customer Relationship Management

Post-Lease Follow-Up and Incentives for New Leases

  • Establish a post-lease follow-up process to encourage customers to renew their leases.
  • Offer incentives like reduced down payments or additional mileage to retain lease customers.

Building Loyalty Programs for Leased Vehicle Customers

  • Create loyalty programs offering exclusive benefits like free maintenance or discounts on new leases.
  • Foster customer loyalty by providing exceptional service throughout the lease term.

Continuous Improvement

Regular Market Analysis and Competitive Benchmarking

  • Conduct regular market analysis to identify emerging leasing trends and customer preferences.
  • Benchmark lease pricing, terms, and residual values against competitors to stay competitive.

Optimizing Residual Values, Lease Terms, and Pricing

  • Continuously refine residual values based on market conditions and historical data.
  • Adjust lease terms, mileage allowances, and pricing to meet customer demand and profitability goals.

Scaling Up and Diversification

Expanding the Leasing Program to Include New Models

  • Introduce additional vehicle models to appeal to a wider customer base.
  • Offer diverse leasing options, from economy cars to luxury SUVs and trucks.

Exploring New Financing Partnerships

  • Partner with new leasing companies or banks to expand financing options.
  • Evaluate financing partners based on their terms, rates, and customer service quality.

Offering Additional Services like Maintenance Packages

  • Create all-inclusive lease packages that include routine maintenance services.
  • Upsell customers on value-added services like tire protection or extended warranties.

Conclusion

Recap of Key Points Covered in the Article

  • Understanding the Leasing Business Model:
    Explained how leasing differs from buying and provided key terms to know.

  • Initial Planning and Strategy:
    Discussed market research, financial analysis, and setting clear goals.

  • Developing the Leasing Program:
    Covered structuring lease terms, setting residual values, and financing options.

  • Building Infrastructure and Resources:
    Emphasized the importance of staff training, leasing software, and marketing strategies.

  • Managing and Growing the Leasing Program:
    Focused on performance metrics, customer relationship management, and continuous improvement.

The Importance of a Well-Planned and Executed Leasing Program

A leasing program can significantly enhance the profitability and growth of independent auto dealerships by providing:

  • A steady revenue stream through consistent monthly payments
  • Increased customer loyalty via repeat leasing and loyalty programs
  • Greater market competitiveness with diversified financing options

However, success requires meticulous planning, effective execution, and continuous optimization.

Encouragement to Embrace Leasing as a Competitive Advantage in the Industry

With thorough preparation and strategic implementation, independent auto dealerships can leverage leasing programs to:

  • Attract a broader customer base seeking flexible vehicle ownership options
  • Differentiate themselves from competitors with tailored leasing solutions
  • Build lasting customer relationships that lead to increased revenue and loyalty

Start your journey towards a successful leasing program today and unlock the potential of this profitable business model.

Stay tuned for additional resources and success stories to guide your dealership's leasing transformation.


Boost your leasing program success with DealerClick's Auto Dealer Leasing Software. Our system simplifies lease management and enhances customer service, helping you efficiently manage inventory, compliance, and customer interactions for superior leasing performance.

Author's Name
By Joshua Aaron. Written in Los Angeles.