Flip side or flop side? A dealership is a house divided. One half is variable and the other half is fixed…what’s the difference between the two? Should they operate independently? Or operate as one? Is one more important than the other? As a dealer or general manager, which one deserves more of your time?
Understanding the Difference
It’s important to know for the dealer who wants to survive and thrive in today’s marketplace.
Why do we call one variable and the other fixed? Let’s start with customer traffic. Variable operations calls them “ups.” Would you say you have the same approximate number of ups coming into your showroom each day of the week and each month, or does the number vary depending on factors such as weather, inventory levels, product, location, market conditions and advertising?
My guess is the number of ups varies greatly from day to day, month to month and year to year. The expenses associated with these factors vary as well and go up and down based on management’s decisions. The more units you sell and the more commissions you pay, the higher the inventory and floor plan interest. And, of course, there’s advertising, which is all over the map.
Fixed operations calls these people customers. Would you say you have about the same number of customers coming into your service department each day of the week and each month? Probably so, because you don’t have as many variable conditions in service and parts as you do in sales. Additionally, the expenses in service and parts tend to be more stable or fixed than they are in sales, right? This is not news to most of you, so what’s my point?
Getting to the Point
My point is: fixed operations can be moved up or down just as variable operations are. Here’s an example of the opportunity I want to share with you: get your hands on your last 12 monthly financial statements. On a sheet of paper, make three columns, one for customer pay repair orders, one for new and used vehicle sales and the other for the month of the year.
Next to each month, enter the number of vehicle sales and the number of customer repair orders. In a perfect world, your customer repair orders should increase by the number of vehicles you’re selling starting with the customer’s first scheduled maintenance, which, let’s say, is at three months. In my perfect world, your columns should look like this:
|Month||New & Used Sales||Customer Pay Repair Orders|
Simply put, if you continue to service the customers you already have and you then sell 100 units in January and they all return for their first scheduled maintenance in March, then you would see an increase of 100 repair orders — which brings your total to 600.
Fixing to Grow
This represents an increase of 20%. The same would then apply for each consecutive month following March. As you can see, fixed operations now becomes bigger and bigger and bigger! As fixed operations becomes bigger from increased traffic, it will of course generate more gross profit, which in turn increases service absorption — which means your dealership has less dependency on vehicle sales to be profitable.
As this cycle progresses, at some point in time, most dealerships will reach a point called 100% service absorption. Those dealers can then weather any economic condition because their dealership has now become recession-proof. Regardless of your factory sales incentives, inventory levels of hot products, turnover of salespeople, price of gasoline/diesel, interest rates and so on, you can still survive and thrive.
They Like You … They Like You Not
Chances are reality has set in by now and you notice that this phenomenon outlined above is not reflected on your sheet of paper. Most likely, March does not reflect that 20% increase in RO count, nor do all of the following months. Why? The next step is to compare this past March to March of last year. What did you find? Is your customer pay RO count higher this year over last, about the same or lower? In far too many dealerships across our country, the answer sadly is lower. Why?
I can answer both of these “why” questions. You may not like the answer, but here it is: “Your customers don’t like doing business with you.” When I say “you,” I don’t necessarily mean you personally, I mean your dealership. You see, you have not given them enough benefits to continue to return to your dealership for service. Your fixed operations are now getting smaller and smaller versus bigger.
So, what are you going to do about it, buy a different franchise that’s exploding at the seams in service? Good luck with that deal!
Get Out of the Rut
The problem here is that the average new car dealer is losing customers in fixed operations at about the same rate as they’re adding new ones in variable operations. The result is stagnation in service, and now it really does become fixed. This has got to stop for the dealers who want to be around for the long term.
You must start growing fixed by making it variable. Give your customers reasons to come back, keep your name in front of them every month, make sure you have convenient hours, train your service and parts team on how to effectively communicate with your customers by offering benefits, always exceed the customer’s expectations and remember: if you don’t care, they won’t either.