Making Service a Profit Center
Believe it or not, 100 percent service absorption is possible. It’s a matter of changing attitudes toward service and providing incentives to technicians.
Does 100 percent service absorption interest you? I hope you said “yes,” so let’s begin with defining what service absorption really is. The calculation is made by taking your total gross profit from the sale of parts and labor (sales minus cost of sales = gross profit) and dividing that total by your total dealership fixed expenses, not to include any variable sales expense (sales commissions, floor plan interest, etc.).
To put it simply, if one can achieve 100 percent service absorption then all of the dealership’s fixed expenses are paid for by the service and parts departments, which means that the sales department is producing net profit on the very first unit is sells. For example, if your sales gross profit was $4,000, your sales commission was $1,000 and your floor plan interest was $500 you would have $1,500 in variable expenses to deduct from gross profit, which leaves you with a net profit of $2,500. Again, I ask, does this concept interest you?
Based on our financial evaluations of RV dealerships all across the country, we find that most dealerships are averaging well below 45 percent. That being said, it then becomes difficult for the average dealer to believe that 100 percent service absorption is indeed attainable since he or she has never done it before nor do they know of any other dealer who has achieved such a feat. Let me assure you that it can be done if you are willing to change. Are you willing?
Owner Attitudes Toward Service
The most significant change that needs to happen is probably a change in your attitude toward your service department. First and foremost you must decide that the service department will become a profit center. Currently, many dealers perceive this department to be primarily a support department for the sales department to prep the units for delivery to their customers and then handle the warranty headaches after the sale.
Once the warranty period has expired there does not seem to be much concern over keeping the customer coming back for retail repairs on their RV. After all, during the “season” the shop is booked for two weeks or longer on any given day so why concern ourselves with the retail repair work?
This is the attitude that needs to change. It needs to change because these retail customers will spend thousands of dollars on parts and labor, which has the highest profit margins, percentage wise, of any product you sell. Additionally, we know that those RV owners who have their RV serviced at the dealer who sold it to them are much more likely to buy their next unit from that dealer.
OK, so now you are willing to change your attitude, but how do you accommodate all of those retail customers during the “season?” We find that those dealers who do in fact have low service absorption also suffer from low shop productivity.
Shop productivity is defined as the number of hours sold on the repair orders (retail, warranty and internal) divided by the number of clock hours the technicians actually worked. Example: 100 hours sold on all repair orders divided by 200 technician hours actually worked, equals 50 percent shop productivity. Our experience shows that most dealers fall into the range of 50-55 percent shop productivity.
Are you starting to get a picture of the opportunity for improvement? I mean, how can you be booked out two weeks in appointments yet your technicians are only 50 percent productive? What happened to the other 50 percent of their working hours? The answers may surprise you.
Giving Technicians Incentives
Technicians, for the most part, are hardworking employees. They brave the cold, the heat, the rain and the snow to perform whatever service or repair is printed on the face of the repair order and most of the time they complete the service or repair to the satisfaction of the customer; however, do they complete the service or repair in as short a period of time as possible?
More importantly, do they have an incentive to complete the service or repair as quickly as possible? It’s called “performance based compensation.” In most RV dealerships the answer is “no” – because the technicians are simply paid by the number of clock hours worked with no regard for the number of hours sold.
If you are a technician, what difference does it make to you if you spend four hours completing a two-hour job? Conversely, if you were paid two hours to complete a two-hour job would try your best to finish in two hours so you could get another repair order to get paid on? If you completed that same two hour job in 1-1/2 hours and still got paid for two hours would that be a good thing or a bad thing? If you are a good technician, a good employee and you have a good attitude you just gave yourself a pay raise! You also just gave the dealer a pay raise!
Now, let’s assume that you install this “performance-based pay plan” in your shop and your technicians’ productivity jumps to 75 percent form the current 50 percent, you just realized a 50 percent increase in labor gross profit. If your dealership is currently profitable, this 50 percent increase in labor gross profit then becomes 100 percent net profit.
Take a look at your total labor gross profit for last year and increase it by 50 percent and then ask yourself if it would be worth changing your attitude to put that much money in your bank account. What would it cost you to do that? Nothing!