Parts and service department revenues can be a valuable – yet often overlooked – part of total dealership revenues.
During times of economic downturn, it is crucial 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 does not produce the results dealers are looking for and in reality only makes the situation worse.
So, why not recession-proof your dealership by maximizing 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.
Service Absorption is Key
The concept that I’m referring to is called “Service Absorption.” This is simply defined as the percentage of your dealership’s total overhead expense, 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:
- Total gross profit from service and parts (sales minus technician wages and cost of parts) = $50,000
- Total overhead expenses $130,000, less variable selling expenses $45,000 = $85,000
- Divide $50,000 by $85,000 = 58.8 percent service absorption
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 $40,000, 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 percent service absorption.
When that happens, your sales department now only needs to produce $45,000 in gross profit in order 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 many customers don’t want to wait two weeks so they find your competition and go 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 percent when it could be more like 90-100 percent. If you increase your productivity to that level you have just doubled your gross profit! That’s right, a 100 percent increase in repair order parts and labor gross profit.
Now you are 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.
Increasing Profits on Labor & Parts
Secondly, look at your profit margins on labor and parts. On labor, your cost of wages for your technicians should not exceed 25 percent of your sales, which in turn delivers a profit margin of 75 percent. If you are currently at 75 percent or higher – good job! If not, then you need to raise your labor rate.
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 35 percent gross profit margin. If you aren’t there then you must adjust your parts pricing matrix accordingly and keep adjusting it until you reach 35 percent.
I recently reviewed a dealer’s financial statement and noted he was averaging only 18 percent 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 the customer who wants their RV serviced and/or repaired.
If you’re currently averaging 30 percent, that additional 5 percentage points needed to get to 35 percent 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.
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 RV 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.
To implement these new processes you must have a plan. The plan must be in writing. You need to set goals for each and every employee who is part of the plan. Next, you have to have a measurement process in place to effectively evaluate the performance of your employees – daily and the results of this evaluation must be reviewed with each of them daily. Lastly, you have to sell them on the benefits of the plan.
Your employees should understand that they will be held accountable for their performance as well as reaching their individual goals. That being said, you have to make sure all employees have the necessary tools, equipment, skills and of course training to successfully reach their goals set by you. Always praise them for a job well done and correct a poor job immediately.
This performance evaluation process demonstrates to all of your employees that you care about improving your dealership and you mean what you say. After all, if they think you don’t care then why should they?
These processes will help you generate that additional gross profit needed to achieve 100 percent 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?