Having spent most of my adult life in and around the retail automobile business, I’ve labored many a day looking at dealer statements for profitable dealers. Inevitably, the conversation goes to, how can the dealership be more profitable? 

Increasing a dealerships service absorption begins with the reconditioning for its used car inventory and ends with the timely service marketing of those customers. 

The typical answers are: sell more cars, make more gross, and increase PVR in F&I. Those things are necessary components of a profitable dealership, but the missing factor in that equation is more often than not service absorption.  

Understanding Service Absorption

Service absorption is the percentage that the parts and service department’s operating gross covers of the total of its combined departments operating expenses, as well as some or all of the total fixed dealership expenses. It’s actually possible for a dealership’s parts and service department to generate enough gross to cover their departments operating expenses, plus the total fixed dealership expenses. 

When a dealership achieves a service absorption level of 100%+, it allows the sales department to be more competitive in the marketplace. More vehicle sales drive more opportunities for an efficient F&I department to sell more products. High service absorption, more vehicle sales, and higher gross F&I profit combine to generate what every dealership works towards — operating profit. 

Parts & Service Department Absorption Formula: Gross Profit (parts & labor) ÷ Fixed Expenses (entire dealership) = Service Absorption %

Basic calculation for fixed absorption rate: Your dealership has $175,000 in gross profit from fixed operations in a month, the dealerships overhead expenses (excluding expenses from vehicles sales, such as commissions) were $200,000.  $175,000÷$200,000 = 0.875, or an 87.5% fixed absorption rate. 

Automotive News reports that “according to the latest Average Dealership Profile from the National Automobile Dealers Association, the average fixed absorption rate for U.S. dealers in the first quarter was 57%.”

The industry, as a whole, has become more aware of the importance the parts and service departments play when determining profitability. Experts agree that an absorption rate below 50% is poor and an absorption rate of 75%+ is excellent.

Having a low absorption rate means that your dealership will be overly reliant upon sales and F&I to be profitable. A dealership with an average of 57% absorption will likely be operating at a loss if sales and F&I were to drop. 

Optimizing Absorption Percentage

There are numerous ways for a dealership to increase absorption percentage. The first thing that dealer principals may rely on to increase service absorption is to write more repair orders for higher amounts — sell more service. Tweaking pay plans, training service writers, changing processes, and focusing on recalls make sense, but a great way to get a jump in absorption is to focus on your used car inventory. Everyone in the retail auto business already knows that pre-owned cars sales generate more gross profit than new car sales, but sometimes they forget that the used car department should be the service department’s top customer. Reconditioning is a constant producer of labor hours and parts sales for the used car department. It’s important to support your service department through your used cars; it will make the car more saleable, road-ready, and at the end of the day, the extra money will not affect the gross profit but will affect the bottom line for the service department. 

The dealership’s goal should be to recondition more cars in less time, because getting the car back on the lot quickly means inventory will turn faster, resulting in more cars sold per month. That will start a sales cycle that will grow labor and parts sales, not to mention more turns for the F&I department that result not just in additional PVR but the increased sale of products like vehicle service contracts (VSC), pre-paid maintenance, and other ancillary products that increase future service absorption. Lastly, loyal service customers are prime candidates for future vehicle sales. 

Of those F&I products that I mentioned, the VSC drives service absorption the most. The sale of a VSC increases PVR and creates higher customer satisfaction. Customers that purchase a VSC from the selling dealership are more likely to return to that dealership for service. 

That’s why maximizing the sale of VSCs in the F&I department at the time of sale and having a solid follow-up program for the 60% of customers that didn’t purchase a VSC is critical to the overall profitability of the dealership.

Using Customer Data Effectively

Now back to that “sell more service” maxim. Once the dealership has captured all of the used car department’s service sales, it’s time to tackle the general public. This is a tougher nut to crack because customers compare and seek out the best service deal just like they do when purchase a car. Add to that the general misconception that the independent shops are always less costly, and the franchise dealerships must give the customer even more of a reason to return to them for service. 

The advantage that the selling dealer has greatly lies in the customer data that they already have on file. Dealerships can use that data to create specific, targeted marketing campaigns that align with a customer’s journey. Using the customer data, the dealership should be able to deliver the right message, to the right customer at the right time and/or mileage.

Attracting new customers is equally as important as keeping your sold customers returning for service, but vastly more expensive. In 2019, NADA said that the average dealership advertising per new unit sold by year, June YTD was $628 per new car sale, and it’s widely thought that the cost is roughly twice that to attract a conquest service customer.

The sales department sells service too. Midway through my retail years, the manufacturers started to require a tour of the service department and an introduction to the personnel. This added sales step also included the scheduling of the customers first free oil change. These best practices helped create a higher level of comfort for the customer to return to the service department.

Increasing a dealerships service absorption begins with the reconditioning for its used car inventory and ends with the timely service marketing of those customers. 

Tom Abraham is vice president of national sales at Automotive Product Consultants, LLC.

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