|Recently, on the front page of another automotive industry publication, the headline read, “Detroit 3 nervous about service.” The article later stated: “As new-vehicle sales slip, dealers will lose service-and-parts cash.” This statement inferred that this will happen due to the ongoing decline in warranty revenue for the dealer, since research shows that the number of “Detroit 3” vehicles on the road that are three years old or less is down 13 percent since 1997. Additionally, we know that the “Detroit 3” are building higher quality vehicles which also reduces the warranty revenues for their dealers. So, I ask you, “Are you nervous about service?”|
If you answered, “Yes,” then what are you going to do about it? The fact that warranty revenue has been declining for years means the dealer who wants to survive and thrive in this competitive marketplace of ours needs to start focusing on building additional service and parts revenue from retail sales. Why get nervous or worry about something that you have no control over such as warranty revenue? You should be nervous, as well as worried, if your retail customer pay parts and labor sales are going down yearly or remaining constant. Your retail sales should be increasing year after year, as should your traffic count (number of repair orders).
Let’s focus on increasing your retail customer pay parts and labor sales. How can you make that happen? I only know of three ways to increase sales and gross profits:
Common sense tells us that increasing your profit margins is the easiest of the three ways listed above. This is the result of nothing more than an attitude on the part of the dealer and his management team to follow NADA guides that have been well established. Simply put, if you are not averaging 72 percent to 75 percent in customer pay labor gross profit margin and 40 percent to 45 percent in customer pay parts gross profit margin, then you are missing out on a substantial opportunity for profit improvement. This loss to the dealer occurs because his employees are giving unauthorized discounts to customers, which is no different than going to the cash register, grabbing a handful of cash and giving it to a customer.
If you don’t believe this is happening in your service department, then I ask you to go to your handy computer and run a report showing your “effective customer pay labor rate” year to date. Then, divide that effective labor rate by your retail labor rate and you will arrive at a percentage. This percentage should be over 90 percent.
If it is 90 percent or greater, give your service manager/director and all of your service advisors a big pat on the back for a job well done. If, on the other hand, your effective labor rate as a percentage of your retail labor rate is below 90 percent and your profit margin on customer pay labor is below 72 percent, then it’s time to hold an accountability meeting with those same individuals.
Here’s a possible topic for consideration in your accountability meeting. Let’s assume your retail labor is $75 (the national average) and your effective labor rate is $62.50 on customer pay labor. Ninety percent of the retail rate would be $67.50, which we must subtract from the actual effective labor rate of $62.50, leaving us a difference of $5. Now, assuming that you are an average dealer writing 500 customer pay repair orders (RO) per month, with average hours per RO at 1.5, you are selling 750 hours at a loss of $5 per RO which equates to $3,750 per month or about $45,000 per year. Since the average front end gross per retail unit last year came in at about $1,450, this lost revenue in labor equals about 31 new vehicle sales every year. If I wanted to buy 31 new vehicles from you this year with a front end gross of $1,450 per unit, would you listen then?
The second way to increase sales and gross profits to help fill the void created by declining warranty revenues is to increase your sales per repair order. Recently, I’ve been told that some so called “industry experts” (aka consultants) are preaching to the dealer body that increasing sales per repair order will only drive their customers away to the aftermarket. They tell dealers that selling will lower your CSI, measuring sales per repair order is not important and increasing sales per repair order will lower shop productivity. They’ll reiterate that service advisors should not be focused on sales, should not be compensated as a salesperson and must stop selling customers products and services that they don’t need, don’t want and can’t afford. I am quite confident that all of the underachieving service managers/directors, service advisors and even dealers are pleased to hear this because these concepts fit right in with your comfort zones. I will address each one of these absurd assumptions.
Increasing sales per repair order will only drive your customers away to the aftermarket: I’ve got breaking news for you; 60 percent or more of your customers have already left. The aftermarket is generating over $45 billion a year in service and parts revenue compared to only $30 billion for the new vehicle dealer. Seventy percent of your warranty customers are already going to the aftermarket for maintenance. I’ve been in hundreds of dealerships and trained with over 1,000 service advisors, and I’ve yet to find one who is driving their customers away by overselling. New car dealers are averaging about $30 or less on one-item oil change repair orders, while the aftermarket is averaging $100 or higher per RO. Who’s selling the customer here?
Selling will lower your CSI: When sales per repair order go up, CSI will increase. Why? It’s because increased sales are the result of effective communication with your customer and thereby advising them of their maintenance needs and requirements in order to help keep their vehicle in like-new condition and maintain their factory warranty and/or extended service contract.
Measuring sales per repair order is not important: Why would you not want to measure and evaluate the results of every sales opportunity? Do you measure your F&I income per retail unit, your finance penetration and your extended service contract sales penetration? Do you measure your average gross per retail unit? Are closing ratios worthy of measuring and evaluating? Does sales performance matter in your new and used vehicle departments? Fixed operations should be no different.
Increasing sales per repair order will lower shop productivity: The logic of those “industry experts’” is that increasing sales per repair order will drive the customer away to the aftermarket, meaning you will have fewer customers and consequently run out of work for your technicians each day. I’m sorry, but this is just plain nonsense! When sales per repair order go up, shop productivity will go up accordingly.
Service advisors should not be focused on sales or compensated as a salesperson: Professionally trained service advisors should be focused on providing every customer the highest level of service that they possibly can each and every time they visit your service department – period! That includes advising them of their maintenance needs. Paying attention to preventative maintenance during the entire ownership cycle will result in a lower cost of ownership that, in turn, saves the customer money. As an ex-dealer myself, if you were an advisor on my service team and you increased your sales by 0.5 hours per RO, or heaven forbid one hour per RO, I would have been most grateful and happily compensated you for it.
Service Advisors must stop selling customers products or services that they don’t need, don’t want or can’t afford: There are dishonest and unscrupulous people in all areas of sales. If you have advisors who fall into this category, then I would hope you would first get a “big stick” to get their attention and then hold the door open for them. I believe the vast majority of service advisors are good, honest, hard working people that have one of the most difficult jobs in any dealership. They deserve our respect and support, but they must be held accountable every day for their performance with your customers.
Remember this; service advisors have the highest impact on owner retention of any employee in your dealership. So, I ask you, have you given them the professional training and tools that they need and deserve in order to provide your customers with the highest level of service that they possibly can?
The third way to increase sales and gross profits is to increase the number of repair orders. That means actively marketing to your database of prospects and customers to earn their business. Then you retain their business!
If you are nervous about service in your dealership, do something today to change the way your dealership operates because there is nothing to be nervous about. There is plenty of business out there if you are willing to work for it.
Vol 4, Issue 4
Emerging service issues darken J.D. Power’s otherwise upbeat 2016-MY vehicle reliability report, which finds an industrywide improvement of 4% and mass-market vehicles outperforming highlines for the first time.