Service Absorption Rule #1

“Maintain your profit margins at 45% C/P Parts and 75% C/P Labor” says Don Reed, CEO of DealerPro Training Solutions.

Maintaining your profit margins is not always easy, and it’s not getting any easier! If you are struggling with profit margins, the first thing you must do is measure what you are getting.

The financial statement is the place to look. On your financial you will find month end data as well as year to date. What we want to take a look at it is the month end numbers from last month. On your financial look at your total labor sales for c/p ROs. Now look for your gross profit. Next to that will be gross profit expressed as a percentage. This percentage is what we are after.

Notice I did not reference your last 3606 or Advisors report. Why? Because what is on the statement is all that matters. At the end of the month will the Dealer Principal ask you about your Advisors report or the financial?
If your GP percentage is at less than 75% we need to start looking at several factors, the most critical is how much do you discount?

The more you discount, the smaller the GP. The number one reason why GP is low in many dealers is the because the money is being given away by the service advisors.

Control your discounts, control your gross profit.

If you look on that same statement, usally right across the column, there will be the parts numbers. If you look at the c/p RO parts sales, there will be gross profit and percentage as well. If this number is less than 45% then we need to look at how the parts are being billed on the repair order. In other words, is the part being billed at the correct price or is it the discounted price? Most GP for Parts is lost the same way it is in Service, it is simply given away.

So, what’s next? Most times a serious conversation and follow up is enough to bring it under control. However, do not hesitate to remove the capability of giving a discount from those who are abusing the privelege. Recheck the numbers at the end of the following month and keep track of changes. The key to increasing Gross Profit is not only knowing where to look but also what to look for!