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Fixed Ops

Increasing Service Absorption Rule #3

Last month, we showed you the opportunity that exists for gross profit improvement by maximizing your profit margins (Rule #1) and increasing your sales per repair order (Rule #2). Based on 500 customer pay repair orders per month, that “opportunity” for profit improvement amounts to about $669,000 a year.

Additionally, we discussed that Rule #1 is the easiest to achieve, while Rule #2 requires some serious commitments from the dealer and managers to change the way they do business. That change requires your fixed operations team to get outside of their comfort zones and start doing things differently, as well as doing different things in order to maximize your customers’ experience each and every time they visit your dealership. Now comes the finale to achieving 100 percent service absorption in your dealership.

Rule #3: Maintain a 6-1 ratio of C/P RO count to total vehicle sales

Let’s take a look at your most recent financial statement. Determine your average new and used vehicle unit sales per month. Multiply that average by six and that should equal your average customer pay repair orders written per month. For example, if you are selling an average of 100 new and used vehicles per month, simply multiply by six and you should average 600 customer pay repair orders per month.

If your ratio is higher than 6-to-1, then you obviously are doing a good job of servicing your customer after they buy their vehicle from you. Your owner retention is good, and you probably enjoy a high percentage of repeat customers on your showroom floor which also means your sales closing ratio is probably above average. Of course, your CSI isn’t too shabby either. Butwhat do we know if your ratio is below 6-to-1?

If your ratio is below 6-to-1, I would have to speculate that your customers don’t like you very much! After all, if you are selling 100 vehicles, why wouldn’t your customer pay repair order count be climbing proportionately? My guess is that you are losing your existing customers at the same rate you are selling new ones. If your repair order count is going down, your are losing your existing customers at a faster rate than you are selling new ones. NOT GOOD!

Question: “How’s your CSI these days?” Did you read my article: “It’s Cheaper to Keep Them”? In that article, I pointed out some statistics from 2005, as reported by NADA. The average dealer in America averaged about $1,500 gross profit PVR, while spending an average of $500 PVR in advertising, which equates to about 33 percent of gross profit. Our research of hundreds of dealers’ financial statements shows that the average dealer is spending less that 5 percent of fixed operations gross profit or about $8.40 per customer pay repair order in advertising to keep the customers they already have! Does this scenario apply to you? If so, do you really believe that this makes sound business sense? Let me sum it up for you: “The average dealer is spending $500 to sell a new customer while spending $8.40 to keep the customers they have.”

Now some of you might have the notion that I am about to tell you to increase your advertising budget. Absolutely not! What I am telling you is to look at your total advertising budget and re-think how you are allocating it. You don’t need to spend more money; you need to spend more of your money wisely.

NADA says the average dealer spent about $30,000 per month in advertising. That being said, consider moving about $5,000 (16 percent) of that $30,000 budget from your sales department to your service and parts departments. If you add that $5,000 to your existing service and parts budget, you have the ability to recruit all your lost service customers.

Every dealer in America wastes money in advertising monthly. Because advertising results are often difficult to evaluate, determining which ad campaigns are a waste of money is difficult. You won’t even notice a difference in your floor traffic, but you will have an immediate, dramatic impact on your service traffic.

Additionally, why not ask your manufacturer to contribute some matching funds from their marketing budget to further assist you in bringing those lost customers back to your dealership. I recently met with a major manufacturer based in Detroit, Mich., and I was told every month some dealers leave money on the table in their advertising co-op. Is there something about free money that you don’t like? If you were walking down the sidewalk and saw $5,000 with a note that said, “Please pick me up and spend me wisely,” would you just step over the $5,000 and let it go to waste, or would you bend over, pick it up and spend it wisely? Now, obviously this money is a benefit to you, so why would you waste it?

Back to Rule #3. If you want to maintain or increase this ratio of 6-to-1, you need a plan. A 12-month marketing plan would be an excellent place to start. “Hold on Don, did you say 12 months? I thought we advertised quarterly, like Spring-Summer-Fall-Winter.”

Yep, I said 12 months. If you are a one-dimension dealer sending out direct mail specials on a quarterly basis, answer these questions please: “Do you advertise new and used vehicles quarterly?” NO! “Do you advertise new and used vehicles on a monthly basis?” NO! You probably have some form of daily advertising for new and used vehicles. You need to start doing the same for service and parts – daily.

Why would you believe that it makes sense to contact your existing customers four times a year, when you are willing to contact total strangers every day? What do we know about your existing customers? They already own your product, they know where you’re located and they liked you enough to buy from you, but they may or may not like you now. When I say “you” I don’t mean you personally, of course. I mean your dealership and employees. We also know that at some point in time you spent about $500 to get them into your database as a customer.

Now, what are you going to do to keep them coming back? If you look at any survey ever conducted in the history of our industry, you will find that your closing ratio on “be-backs” or repeat customers is a minimum of three times that of a new customer (60 to 70 percent repeat customers versus 20 percent or less for new ones). We also know that your gross per retail unit on repeat customers is normally higher than it is on new ones. Who has the most contact with the customer during the warranty period – the salesperson or the service advisor? Who has the most impact on owner retention – the salesperson or the service advisor? If they keep coming back after the warranty expires, who has the most contact with them – the salesperson or the service advisor? I hope my point is clear by now.

OK, now that we all agree that it’s cheaper to keep them! How do you prepare a marketing plan for service and parts using this new budget? I will show you how to build one that will keep your sales to RO ratio above 6 to 1 next month.
Vol 3, Issue 11


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