Your Customers Are NOT Self-Help Mechanics …
Let’s consider this question: “What percentage of your customers take delivery of their new or used vehicle and then, once they get home, remove that maintenance manual so they can review and study their required and recommended maintenance services?” I don’t know the exact answer but I’m pretty confident the answer is “not very many.”
I’m talking about the Transmission services, coolant flushes, air filters, Pollen Filters, (which very few customers know they need), alignments, tire rotations and the list goes on and on and on! Everyone knows when to change the engine oil, but how many do you really think know when to perform all of those other maintenance services?
Next question: “Are all of your customers mechanically inclined and can perform all maintenance services on their vehicle themselves?” Chances are many if not most of them can’t even spell wrench let alone know how to use one. My point here is that most customers rely upon someone with knowledge of their vehicle to provide recommendations for the proper maintenance and service on their vehicle.
It’s kind of like going to the dentist who performs an inspection of your teeth on each and every visit and makes recommendations to you based on time since your last visit and the condition of your teeth. You know that you have to brush after every meal, and you know you have to floss, but there are other things your teeth need, that you may not know. You rely upon a professional to help you maintain healthy teeth.
An automobile customer is no different. They rely upon a professional, your technician or your service advisor, to properly advise them on how to maintain a reliable and safe vehicle which of course in the long run provides a much more enjoyable driving experience. There’s nothing worse than going on a trip with the family and you start having a problem with your vehicle, right?
These Missed Profit Opportunities Might Surprise You …
Now let’s look at the profit potential regarding this process of inspecting every vehicle and making recommendations to your customers for additional maintenance. In working with dealers all over the country, I have found that a complete and thorough inspection will produce on average an additional 0.7 hour of labor per retail work order. Let’s use the following assumptions when calculating the profit opportunity in our model dealership/service facility:
- Retail Labor Rate of $85 per hour
- Retail Labor Profit Margin of 75% (Techs are paid $21.25)
- Parts to Labor Sales Ratio of 0.8 to 1 ($0.80 in parts sales = $1.00 in labor sales)
- Retail Parts Profit Margin of 45%
- Average 500 Retail Work Orders per month
By performing complete and thorough inspections of all 500 vehicles we find, on average, 0.7 additional hours to sell at $85 per hour equals $59.50 in labor sales at a profit margin of 75% produces additional gross profit of $44.63. At a 0.8 to 1 ratio our parts sales would be $68 with a profit margin of 45% produces additional gross profit of $30.60. Add the two together and our total additional gross profit equals $75.23 per work order multiplied by our 500 work orders and the result is an additional gross profit of $37,615 per month, annualized comes to $451,380 for the year for every 500 work orders.
Anxiety Relief …
Ask yourself this question: “How many additional vehicles do I need to sell to produce another $451,380 in gross profit?” If your average gross profit per unit is $1,500 this equates to 301 additional vehicles. In today’s sales environment?
Does that get your attention?
The point is you need to start looking at your service and parts departments as true profit centers that can not only stand on their own but actually generate enough profit to cover all of your dealership’s fixed expenses. That’s Service Absorption! This means you have less dependency on new and used vehicle sales to make a net profit which becomes a huge benefit during a soft market, high interest rates, high cost of fuel, bad weather and a whole lot of other ills.
Step Up Your Service Commitment
In far too many dealerships, the service and parts departments are simply there to provide support for the sale and delivery of new and used vehicles. Their secondary role is to take care of all the warranty repairs and last of all if time permits they will write a retail work order for cash business. I’ve actually been in a service department that told customers that if they didn’t buy it here they were low priority.
If this philosophy makes sense to you then welcome to the dark ages! As you can imagine, this dealer was losing money in his service and parts department in numbers that would take your breath away. Would you want to be a Service Advisor or Service Manager in that store? It’s worth noting that the turnover in those two positions was quite high!
Why would you want to operate any department in your dealership at a loss to support another department? I believe it makes a lot more sense to operate every department as a standalone enterprise that works with the other departments to maximize performance and profits. It’s called return on investment.