Does 100 Percent Service Absorption Interest You?
I hope you answered “Yes” to the question above. So, let’s begin with defining what “service absorption” means.
It is calculated by taking your total gross profit from the sale of parts and labor, which is sales minus the cost of parts and labor sales and dividing that total by your dealership’s fixed expenses. Do not include any variable sales expenses such as sales commissions or floor plan interest.
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 it sells. For example, if your sales gross profit is $4,000, your sales commission is $1,000, and your floor plan interest is $500, then you have $1,500 in variable expenses to deduct from gross profit, which leaves you with a net profit of $2,500.
Based on our financial evaluations of RV dealerships across the country, we find that most dealerships are well below 45 percent. That means it is difficult for the average dealer to believe that 100 percent service absorption is indeed attainable since he or she never did it nor do they know of any other dealer who achieved such a feat.
Well let me assure you that it can be done if you are willing to change.
The most significant change needed is to change your attitude toward your service department. First, you must believe your service department will become a profit center. Currently, many dealers perceive this department as a support department for the sales department and to prep units for delivery, then handle warranty headaches after the sale.
Once the warranty period expires, there does not seem to be much effort to keep the customer coming back for retail repairs. After all, during the “season,” the shop is booked for two weeks or longer on any given day, so why worry about retail repair work? This attitude needs to change because retail customers will spend thousands of dollars on parts and labor, which have the highest profit margins of any product you sell. Additionally, we know the 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.
We find that the dealers who have low service absorption also suffer from low shop productivity. Shop productivity is defined as the number of hours sold on retail, warranty, and internal repair orders, divided by the number of clock hours the technicians actually work. For 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? How can you be booked out two weeks in appointments when your technicians are only 50 percent productive? What happened to the other 50 percent of their working hours?
Technicians, for the most part, are hard working 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 time as possible? More importantly, do they have the incentive to complete service or repairs as quickly as possible? It’s called “performance based compensation.” At most RV dealerships, the answer is “No,” since 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 you 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 90 minutes 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 from 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!
by: Don Reed
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!
Service Absorption Rule #2
“Maintain your hours per C/P Repair Order (RO) at a minimum of 2.5” says Don Reed, CEO of DealerPro Training Solutions.
If you are currently at the national average of 1.5, then this might seem a bit of a stretch. It’s always a stretch when it’s as big as an elephant. And we know how to eat an elephant, right…..one bite at a time.
So, let’s break it down into bite sized pieces.
In the pursuit of HPRO the first thing we must have is well trained personnel. This means everyone including the cashier must have training.
What kind of training?
If you are a person that has any customer contact (read everyone in the dealership) then Customer Service Skills would be high on the list. This includes everything from how to greet to how to answer the phone.
Now, you would think that a business that relies so heavily on the phone would have phone training on a regular basis.
Wrong.
Call your parts department sometime and ask about a special order part. Call the service department and ask to speak to the owner. See how long you are on hold. Call the receptionist and ask to speak to the detailers. Call and ask for a shuttle driver to come a pick you up.
The point is, it’s not only the day to day calls it’s also the unusual, the “you called parts and you really want sales” call that tells the tale.
Second, conduct regular Sales Training. Sales Training is for anyone in contact with the customer on a regular basis. Does this sound familiar?
Everyone in the dealership is a salesperson. The greeter who sells friendliness, the parts counter person who sells a part, the service advisor who sells the labor….everyone is a salesperson and yet why is it only the salespeople get sales training?
Lastly, maintaining 2.5 HPRO is a direct result of what you measure. You can conduct phone skills and sales skills training, and if you never spend a second listening or critiquing to those whom you have just trained, you have wasted your time.
What we measure determines what we focus on. If we consistently ask our advisors “You wrote 12 CP ROs yesterday and only booked 8 hours. Can you tell me what happened?” after awhile, they will be prepared to answer that question before you even ask it, which means they are focusing on…you guessed it…Labor Hours per RO.
Try it. Start asking your advisors about something specific for a week and see what happens.
Maintaining 2.5 HPRO is a lot more difficult than attaining 2.5 HPRO. Just take it one bite at a time and before you know it, you will have 100% Service Absorption.
Service Absorption Rule #3
“Maintain a 6 to 1 ratio of C/P RO count to total vehicle sales” says Don Reed, CEO of DealerPro Training Solutions.
That sounds simple enough. If you are currently selling 100 New and Used a month, then that pencils out to 600 Customer Pay Repair Orders per Month, not including Warranty and Internal. It’s the CP RO count we are after.
So, you just realized that your RO count is low, right? What are you going to do about it? If you are thinking that you need a big production that costs a lot of money and the only thing that you can do is advertise to get more Customers in the door, think again.
Certainly advertising can be a part of the overall strategy to bring customers back in. “You don’t need to spend more money-you need to spend more of your money wisely” says Don. Which means that you need to look at reallocating some of what you already spend elsewhere (Sales) and give it to Service where you can realize a much better ROI.
“The average dealer is spending $500 to sell a new customer while spending $8.40 to keep the customers they have.”
And, if you do the math on a 500 RO (Customer Interaction) Service Drive and the typical 100 car store, you can expect to pay $50000.00 to get results that are somewhere north of say $145,000.00 in Gross Profit from the sale of those cars, or, you can spend $5000.00 in your Service Department ($10.00 per Customer) for a $153,000.00 Gross Profit return.
Thats 30 times over what you invested…vs a 2.9% ROI in Sales. 30 times! If I asked you to give me a $10.00 bill and I told you that in exchange for that $10.00 I would give you back $300.00, would you do it? Of course you would!
While advertising is part of the overall strategy and is part of your planning, it is another tool to be used in conjunction with everything else you do in Customer retention and marketing.
In fact, there are at least 20 different things that you can do right away (in the next few months) that will have an immediate impact on your RO count. Most of them require nothing more than a little elbow grease and awareness.
Getting to 100% Service Absorption is a decision. Decide to have better Absorption this year.
