Why do we classify half of our dealership as variable and the other half as fixed? What is the difference between the two? Should they operate independently of one another or operate as one? Is one more important than the other? As a dealer or general manager, which one deserves more of your time? These are interesting questions that are worthy of much discussion 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 a great deal from day to day and month to month, as well as year to year. The expenses associated with these factors vary as well and go up and down based upon managements’ decisions. The more units you sell, the more commissions paid, the higher the inventory, the higher the floor plan interest--and of course there’s advertising, which is all over the spectrum.
Fixed operations calls traffic 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? Of course, this is not news to most of you reading this article and you might be wondering what my point is.
My point is: fixed operations can move up or down just as variable operations do. 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 the month of the year, one for new and used vehicle sales and the other for customer pay repair orders,. Next to each month, enter the number of vehicle sales and the number of customer pay repair orders. In a perfect world, your customer pay repair orders should increase by the number of vehicles you’re selling, starting with the customers’ first scheduled maintenance which, let’s say, is at three months. In my perfect world, your columns should look like this:
Month New & Used
Vehicle Sales Customer Pay
Repair Order
Jan. 100 500
Feb. 80 475
Mar. 110 600
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. This represents an increase of 20 percent. The same would then apply for each consecutive month following March. As you can see, fixed operations business now grows and grows! As fixed operations becomes bigger from increased traffic, it of course generates more gross profit, which in turn increases service absorption. That means your dealership has less dependency on vehicle sales to be profitable.
As this cycle progresses, at some point most dealerships will reach a point called 100 percent service absorption, and those dealers can then weather any economic condition because their dealership has now become recession proof. Now, regardless of factory sales incentives, inventory levels of hot products, turnover of salespeople, the price of gasoline/diesel, interest rates and so on, you can still survive and thrive.
Chances are, by now, reality has set in and you notice that this phenomenon outlined above is not reflected on your sheet of paper. Most likely, March does not reflect that 20 percent increase in RO count, nor do any of the following months. Why? The next step is to compare March 2008 to March 2007. 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 the “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 return to your dealership for service. Your fixed operations are now shrinking instead of expanding. 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!
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 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.
Don Reed
CEO, Fixed Ops Solutions
DealerPro Training Solutions
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