If you are an equipment dealer, you are probably thinking this has to be the most stupid question you’ve ever been asked. You are accustomed to being told (in sometimes impolite terms) that you had better figure out how to (quickly) increase your dealership’s market share.
Dealers in every industry are being pressured on a regular basis to improve their market share. It has become the “nature of the beast.” We became familiar with the term “market share” well over 50 years ago. Its usage has grown to the point where it has become the number one issue between manufacturers and equipment dealers today.
Who benefits from increased market share? Is it equipment dealers? If so, how do they benefit? Dealers are constantly being asked (or told) to reduce their equipment margins. Margins on equipment sales in most industries today have dropped to the low single digits, with no end in sight. If a dealer’s market share drops, then he is given a warning and a time limit for reaching the manufacturer’s arbitrary goal. In some cases, the dealer is given an option: To be either a buyer or seller of the manufacturer’s line of products. If a dealer chooses to become a seller, he will be told to whom he can sell his dealership.
Does the supplier/manufacturer benefit from increased market share? This question is impossible to answer, as the availability of “hard numbers” is very limited. I’ve been told it makes stockholders very happy. In many instances, corporate officers and management personnel receive bonuses based upon market share. That is one of the reasons market-share pressure builds at the end of the manufacturer’s fiscal year.
Herb Kelleher, who successfully started and grew Southwest Airlines, made this comment: “Market share has nothing to do with profitability. Market share says we just want to be big and we don’t care whether we make money doing it!”
On Nov. 29, 2011, American Airlines, one of our country’s largest airlines, filed Chapter 11 bankruptcy. Their goal over the years was to continually increase their market share. Right after the holiday season, Sears and K-Mart announced they were shutting down stores in certain locations because of “weak sales over the holidays.”
Did these announcements have anything to do with the “sagging economy,” high fuel prices, or unemployment? This is quite likely, but many experts believe it goes deeper than that. It stems from an overall attitude of indifference from the top down in corporate offices. As reported by numerous news agencies, this indifference results in deteriorating and then destroying customer satisfaction.
Let’s carry this over to the equipment industry. The dealer’s basic function as a customer of the manufacturer/supplier is to both sell and service the products produced by the manufacturer/supplier. These two functions, plus the handling of used equipment, are functions the manufacturer/supplier cannot perform.
Equipment manufactured today is extremely sophisticated, and is becoming more complicated and difficult to service. One thing that has never changed in the marketplace is the customer’s concern about service after the sale. Customers cannot afford any unscheduled down time. They want to know after the sale there will be someone there to take care of their service needs and requirements. They continue to want high parts availability and quick service response time.
As mentioned in many of our articles, most equipment dealers have a low service contribution to sales percentage. In all too many cases, this contribution is below 10 percent, and that is mediocre at best. As we mentioned in last month’s article, it is the dealer’s service department that carries the dealership’s highest margins.
This is why we constantly point out to dealers that if they are going to continue to reduce their margins on high-priced equipment, they had better develop a solid marketing plan for selling customers the dealership’s services after the sale. If this does not happen, even the 5-6 percent service contribution will begin to erode as customers try to do the work themselves, seek out independent shops, give the “shade-tree technicians” an opportunity or seek out those fleet management companies that are beginning to develop throughout the country. Dealers can ill afford to lose even that meager five percent service contribution. If they lose that, their cash flow will begin to dry up while their absorption rate will drop dramatically.