I think just about every dealer would agree that doing business in today’s world is vastly different than doing business 40 years ago. Yet many of my dealer friends still rely on metrics and methods that were established 40 years ago to measure performance and determine budgets.
The typical service marketing budget is a prime example. According to NADA, service is responsible for 47.3 percent of dealership gross profits. However, from working with many dealers I estimate that service marketing is less than 10 percent of the average dealership’s marketing budget.
Why aren’t dealerships investing more dollars in service marketing to support fixed operations?
Many of my dealer friends argue that vehicle marketing indirectly drives service profits by setting up future warranty and customer pay opportunities. They feel that the alignment is not as bad as it seems.
I contend this argument doesn’t hold water for two reasons.
Dealers are Leaking Service Business
Forty years ago, you were pretty much guaranteed a substantial amount of warranty work and in-warranty customer pay business just from your new vehicle sales. The more new cars you sold, the more service work you got.
However, today’s franchise dealers only capture 20 to 25 percent of revenue potential from their Units in Operations (UIO). That’s a 75 to 80 percent leakage rate to the competition. For many years now, independent aftermarket chains have steadily been increasing market share.
Additionally, today’s vehicles are higher quality and require less maintenance. For dealers, this means less warranty work, less standard maintenance work and more replace-than-repair work. The fact that you may be selling more new cars than ever does not translate to more service work than ever.
Historically, dealers have always set a service marketing budget based on a number of dollars per new vehicle sold. But don’t forget, you also sell a lot of used cars. In fact, your pre-owned customers make far better service prospects than new-car customers. What about setting your budget based on a dollar amount per used vehicle sold?
When I was at AutoNation, I remember at one point we were spending $85 on service marketing for every new car sold. This was determined as a percentage of gross margin, but didn’t take into consideration many other factors. For one thing, if you’re a Mercedes dealer, shouldn’t you be spending more to market your service department than a Nissan dealer?
Additionally, an increase in leasing places more vehicles in the hands of second owners that much earlier. These are also ideal customers for your service department — why wouldn’t you allocate a percentage of gross profit from your vehicle leases towards service marketing?
The fact is there’s no rhyme or reason to how dealers come up with their service marketing budgets. Only that “it has always been done this way.” If I made a recommendation to increase your service marketing spend from $1,500 per month to $2,500 per month, you would probably think that’s a huge increase. Yet you spend $40,000 per month on the sales side without hesitation.
Service Feeds Sales
There’s no doubt that sales does feed service to a degree, but to what degree? Doesn’t service also feed sales? I would argue that business flows at least equally in both directions.
First, how many of your service customers were once sales customers? The indirect impact from sales is at best half, but more likely 20 to 25 percent as we have already established above.
You can have a 100 percent service absorption rate but still be losing market share, which does not bode well for the future.
Above all, your focus should be on increasing loyalty and retention rates. Did you know that customers who bring in their car for service are 1.5 times more likely to remain loyal than non-servicing owners? In addition, loyal customers who purchase from you again pay higher margins on their next vehicles, providing a greater loyal sales base needed to sustain your store through challenging economic and product cycles.
It would be interesting to conduct an analysis on which way the net arrow points: sales to service, or service to sales? If nothing else, the over reliance on a mindset and metric established 40 years ago justifies a fresh look at this huge misalignment in marketing dollars.
What Should Your Budget Be?
So, how much should you be spending on your service department? That’s a good question, and one that only you will be able to determine. I can, however, suggest a method for determining the right level for you over time.
I once had dinner with a former Expedia CMO and I asked, “How do online businesses determine their marketing budgets?” He stated that Expedia didn’t have an ad budget. I asked “What do you mean?” My friend explained that as long as every dollar of marketing spend yielded three dollars of revenue, he was allowed to keep spending. That seems very logical!
So, what would this look like in our industry? Many dealers are perfectly fine spending $300 on a TrueCar lead which yields at best $1,800 front and back gross. Marketing spending across the industry per new vehicle sold was $630 in 2016, or 33 percent of variable ops gross margin. Using this formula, you should be satisfied with an incremental service marketing spend that yields 10 times in gross. Since the average dealer service and parts gross profit per month is $177,000, that would mean you should be fine with a service marketing budget up to $17,000 per month.
OK, I can practically hear you choking. But why is this crazy? Isn’t it just as crazy that you are leaking 75 percent of your new car service business to the competition? As new and used vehicle margins decline and you rely on your service department to contribute a greater percentage to your store’s gross profit, why wouldn’t you spend more on service marketing?