You can’t save your way into profitability. During a slowdown, it is vital that you pursue every available profit opportunity in your dealership. In many cases dealers start looking for ways to reduce expenses in order to save their way into a profit. More often than not, this only makes the situation worse.
The Answer You Need — Right Now!
You can make up for lost salesby maximizing your revenues in your service and parts departments. Let’s take a look at some proven processes and ideas that will enable you to make more money.
First, we have to understand the important concept called “Service Absorption.” This is simply defined as the percentage of your dealership’s total overhead expenses less the sales departments’ variable selling expenses that is paid for (absorbed) by the total gross profit generated by the service and parts departments. Here is an example:
Monthly Service and Parts: Total Gross Profit from Service & Parts (Sales minus Tech wages and cost of Parts) = $50,000
- Monthly Sales: Total Overhead Expenses ($130,000) less Variable Selling Expenses ($45,000) = $85,000
- Divide $50,000 by $85,000 = 58.8% Service Absorption
How Busy Are You?
As you can see from this example the sales department now has to generate enough gross profit to pay for their variable selling expenses of $45,000 plus the remaining $35,000 of overhead expenses in order to break even. So, in this example you need to generate an additional $35,000 in service and parts gross profit to reach 100% service absorption.
When that happens, your sales department now only needs to produce $45,000 in gross profit to reach break even. Does this make sense yet? If so, then let’s look at what opportunities are available to you that will enable you to work toward producing that additional $35,000 in gross profit per month.
To begin with, find out how many days you are fully booked for service appointments with retail customers, both warranty and customer pay. Some of you are booked two to three weeks out, which simply means you are losing business. I say that because customers don’t want to wait two weeks to get their car serviced, so they find your competition and head there instead.
Chances are, if you have a backlog of appointments you either have a lack of capacity or low shop productivity. In most cases, the problem is low shop productivity, which I find to be around 45-50% when it could be more like 90-100%. If you increase your productivity to that level, you have just doubled your gross profit! That’s right. . . a 100% increase in repair order parts and labor gross profit!
Now you’re moving toward that goal of generating an additional $35,000 in service and parts gross profit. To get that extra productivity, you obviously have to do something different than you’re doing now. That something is performance-based compensation for your technicians, service advisors and managers. Simply put, you must compensate to motivate.
Check Your Margins
Next, look at your profit margins on labor and parts. On labor, your cost of wages for your technicians should not exceed 25% of your sales which in turn delivers a profit margin of 75%. If you are currently at 75% or higher – good job! If not, then you need to raise your labor rate.
I mean if you already have a backlog of appointments, do you really believe anyone cares about another $5 or $10 an hour? Not likely. For retail parts (not warranty) you should average about 45% gross profit margin. If you aren’t there, then you must adjust your parts pricing matrix accordingly and keep adjusting it until you reach 45%. I recently reviewed a dealer’s financial statement and noted he was averaging only 18% on retail parts. Your local grocery store makes more than that on a head of lettuce!
Again, just like the labor cost, it won’t make any difference to your customer who wants their vehicle serviced and/or repaired. If you’re currently averaging 40% that additional five percentage points needed to get to 45% does not amount to much money on the average customer pay repair order, but it amounts to thousands of dollars on the hundreds of repair orders you write every year.
Inspect to Grow
Lastly, now that you have more customers coming into service each day through increased shop productivity and you have improved your profit margins, you need to increase sales per customer pay repair order. The most effective way to do this is to perform a complete and thorough inspection of every vehicle you service, just like you would if it were an internal used unit that you were reconditioning for retail sale.
Once the inspection is complete, you must review the results with your customer and ask for their approval to perform the necessary services or repairs. You can expect to add no less than one hour per repair order by using this process, as well as additional parts and accessory sales.
These processes will help you generate that additional gross profit needed to achieve 100% service absorption. . . and keep you on track to weather any economic downturn, as well as maximize your profits, during the economic booms. Don’t you think it’s time to get serious about service?
Don Reed, CEO, DealerPRO Training