Time off . . . August 3 through August 17
August 2nd, 2008I will be out of town between August 3 and August 17. I will be back online on August 18. See you then . . .
If there was just one reason why new car dealerships can’t retain customers . . .
August 1st, 2008
So what is wrong with a modern dealership’s service department? Why can’t they keep customers? Most people would rather go to the dentist . . . or even shop for a used car . . . than go to a dealership for service or repairs. What are they doing wrong that neither they nor the manufacturers and distributors seem to be able to correct?
They would never admit it (mostly because they would never believe it), but it may be that the manufacturers and distributors caused it and continue to perpetuate it. A friend of mine thinks the current mess was started by a few MBA’s working for import distributors back in the 80’s. That at their direction modern corporate ‘business principals’ were introduced that effectively replaced the words ‘service’ and ‘customer’ with the word ‘profit’. Since that time all the service department’s training has danced around this word . . . as well as all quantifiable measures of performance . . . and all pay plans . . .
So what happened?
There are a couple of ways to rate the financial health of a new car dealership. One that has been around for a long time is called absorption. 100% absorption means that the profit created by the parts and service departments is sufficient to cover expenses of the parts and service departments as well as all fixed operating costs for the dealership (rent, insurance, advertising, depreciation, etc.) and the owner’s income. When this is done, the net of each car sale is mostly profit. The dealer can afford to go deeper into the margin to ‘make the deal’ . . . and thus beat the competition.
The concept of absorption and the manipulation of its components is easy to understand but difficult to execute. If the parts and service business drops or the fixed expenses increase the absorption rate decreases. If the dealer decides to give himself a raise so he can afford a winter cabin in Tahoe . . . the absorption rate decreases. Whenever the absorption rate decreases the profit margin on unit sales also decreases . . . making it more difficult to increase the vehicle sales rate because the depth of the margin allowing a ‘break even’ sale decreases. It takes an astute and intuitive businessman who thoroughly understands the car business to balance the components in a manner that will achieve 100% absorption.
Over the years absorption has empirically proven itself to be an accurate measure of the fiscal health of a new car dealership. Dealers at 100% are successful . . . dealers below 80% can find it difficult to compete.
The absorption model is ‘service’ oriented. If a dealership increases sales volume without increasing parts and service net income the absorption rate stays the same. To ‘grow’ the dealership must increase parts and service net income. The most economical way to accomplish this is to retain old customers while making sure new sales customers become parts and service customers themselves. In other words . . . the purpose of the sales department is to create customers for the parts and service departments. The purpose of the parts and service departments is to retain those customers. Unit sales margins increase because retained (loyal) customers don’t shop around as much . . . business capital increases as vehicle sales and unit sales margins increase . . . the dealership grows.
But during the 80’s another approach to the absorption model developed. There had been a problem with domestic product for quite awhile. Engineering and build quality had plummeted . . . at the same time import engineering and build quality had improved. Loyal customer bases started to erode as car owners became fed up with domestics and started to buy the imports. Absorption rates fell.
Savvy domestic dealers diversified by acquiring import franchises. One common scenario was that when the domestic store outgrew its facility they would buy more land and build a new facility. Rather than leaving the original facility vacant or turning it into a used car lot they would start up an import franchise. Another scenario was that the dealer would simply start selling imports from his domestic showroom and lot . . . a ‘dual’ franchise. From the import manufacturers point of view these were ‘OK’ strategies during the startup years. It was an easy sell (to the domestic dealer) and it got a maximum number of import dealers up in a minimum amount of time.
But import distributors became tired of being represented in second-rate facilities. They had established a market . . . now they wanted to build quality of image and brand. They wanted new, modern, stand-alone facilities. Unfortunately, in many cases, when dealers looked at the costs involved it just didn’t pencil. The rise in fixed costs would drop the absorption rate below the ‘safe’ level of 80%. It was a hard sell for the importers. To be successful the importers needed to overcome the ‘absorption‘ objection.
Their approach was to ‘rework’ the dealership business model. In the ‘new’ model each department is a separate ‘profit center’. Service, parts, new car sales, used car sales, and finance are each responsible for their own gross profit and expense. They are also responsible for a fixed percentage of the dealership operating costs.
In this ‘new’ model the service department has three primary objectives:
- The shop should strive for 100% productivity. This means that the shop should provide each technician with a full day’s work. Obviously an idle technician and an idle service bay equate to a loss of potential revenue.
- The shop should strive for 100% efficiency (or better). This means that the shop (as well as each technician) averages flat rate or better in time taken to complete repairs performed. Flat rate refers to the published time (published by the manufacturer, Mitchell, Motor, Alldata, et al.) to complete a specific job.
- The shop should strive to get 3 to 4 labor hours on each repair order. There are other or additional criteria similar to labor hours per repair order such as dollars per repair order, labor dollars per repair order, and parts dollars per repair order. All of these are ‘upsells’ designed to increase job efficiency by decreasing auxiliary tasks per dollar sold . . . in other words it takes less time for the service writer upsell 2 hours than it takes for him to write another repair order for a different customer . . . it takes less time for a technician to move two cars a day in and out of the repair bay than it would take him to move four . . . etc.
The first two criteria, concerning productivity and efficiency, represent tools that are helpful in the management of most repair shops toward improving shop profitability.
The third criteria presents the idea that the customer can be managed to improve shop profitability. Although there may be anecdotal evidence that this represents a historical tradition in the car business . . . there are crooks in every business . . . don’t be one of them!
Consider what happens from the customer’s point of view. The customer comes in with a noisy fan belt expecting a 45 minute inconvenience and a $35 bill . . . the writer upsells him blades, hoses, a coolant flush, and a trans service. Now the customer is there for four hours (through lunch) and gets charged $300. The customer knows he’s been ‘sold’, his self-esteem has been battered, he’s hungry, his day is gone, and he’s out $300 mostly for stuff he knows he didn’t need. Did you think you tricked him? Nope. You just swindled him, and he knows it. He won’t be back.
Read the above paragraph twice if you wonder why your service department isn’t earning repeat business!
A good service writer should strive to determine what a customer’s expectations are . . . and then meet those expectations at a fair price. This is a ‘technique’ that the better independent shops have been using for years to ‘steal’ business from dealerships. What’s ironic is that dealerships are losing far more business (due to their service departments) than they realize. But that’s going to have to be another post.
Thanks for reading . . .