Focus upon unrecognized opportunity!
Marketing your service to customers who will be purchasing your dealership’s equipment or to those who already own your equipment is an honorable opportunity for showing customers the positive aspects of purchasing your service, while helping them to understand the price you are asking is outweighed by the value they will receive.
For years we have focused with equipment dealers on the need to market their service department with the same enthusiasm and intensity they put forth in the marketing of the equipment they have chosen to market. We have developed seven marketing steps for dealers to market their service. This article will focus upon seven steps for dealers to grow the profitability of their service departments. For dealers who still believe you can’t make a profit in your shop, stop right now! If you believe there is no way to be profitable in your shop, you will be wasting your time reading this article. We contend that half the battle is a true belief that the opportunity exists to make a profit in any service department, against any competitor!
Year-after-year, we continue to study cost-of-doing-business studies for all types of equipment dealerships. Year-after-year, we continue to see average service contribution running in the area of single digit figures and as a consultant we continue to ask equipment dealer’s why? On the positive side, we know and work with dealers who are running at 25%, 30% and yes, even higher contributions, at high margins. These are the dealers who laugh when they hear their “fellow” dealers complain they just can’t sell service and if they do they have to cut their margins to do so.
Is it because the typical dealer’s background is sales oriented? Is it because the manufacturers typically neglect to encourage their dealer to market their service? Is it because too many dealers take a negative approach to increased service sales, i.e., the need to hire more technicians who will need expensive training, or have to increase the overall size of the dealership, or that they have to market the dealership’s service with the same enthusiasm and intensity that is required in marketing equipment?
We can continue to think negative about our service department opportunities or we can take a completely positive attitude toward service. It is the equipment dealer’s last opportunity for high profitability. How many times have you heard yourself or your fellow dealer make a comment such as: Margins are declining dramatically on our equipment and now the manufacturers are cutting our parts margins and there is absolutely nothing we can do about it! Couple the unrecognized sales opportunities from service with the unrecognized opportunities for service profits and you will be in a position of controlling your own destiny. You will have created a winning combination for success. It is your decision to do so.
Here are seven specific steps to consider in order to turn your service culture completely around: 1) Set up your shop as an individual profit center, a department that covers all of its expenses and has a “big chunk” left over for the dealership. 2) Eliminate all of your shop internals. Most internals are nothing more than sales person’s discounts anyway. 3) Look at your shop’s percentage of contribution to total dealership sales. Whatever it is, determine what is needed to increase this contribution by 5% to 7%. 4) If your shop is not “flat rate”, consider doing so. 5) Analyze your shop and individual technician’s service billing efficiency. Determine your own percentage number and compare it with industry standards. Whether it is: 60%, 65% or even 70%, figure out a specific increase for the coming year. See what a minimum of 5% improvement would do for your overall profitability. 6) Figure your service gross profit. If it is running at 50% to 55%, figure out your increased profitability with an additional 5% to 10%. 7) Last but not least, if you are not “flat rate”, take a long hard look at your hourly labor rate and decide if you are making sufficient profit off of that labor rate. Don’t look at your labor rate through the eyes of your sales department; don’t look at it from the standpoint of what is being charged down the street. Look at your own labor rate on the basis of what you must charge to make an acceptable profit on your overall shop investment. Any shop is labor intensive and generally most shops employ more personnel than any other department within the dealership. Personnel costs and expenses have a tendency to increase 75% faster than other dealership expenses. You can be assured the government will see to it that this will continue into the future.
Equipment dealers will be paying a premium for qualified technicians both now and in the future. It is already a situation of supply and demand. If your labor rates do not increase accordingly, how will you cover the cost of increased technicians’ wages? Most equipment dealers today are out of line with other segments of the business world as far as labor rates are concerned. Consider the plumber or the computer service technician. Look at the equipment your technicians are servicing. With every passing year this equipment gets more and more technical and complicated.
Plan your labor rate increases. Why not consider something simple like a $4.99 an hour increase every six months? Sound reasonable? Some equipment dealers raise their labor rate only every three years. It is far better to do it on a quarterly or semi-annual basis than it is to make a $25 to $30 dollar increase after five years of no increases and after suffering a tremendous loss of profitability over those years.
Whether your dealership is a million dollar operation or a multi-million dollar operation, the ideal situation involving the seven changes mentioned is that in all of the seven changes, additional expenses can be kept to a minimum. By doing this, additional profitability drops to the “bottom-line” of the dealer’s financial statement. Very few changes in a typical equipment dealership can have this overall dramatic effect upon any dealership’s profitability! Can these changes be made painlessly and without a whole lot of additional effort? Certainly not! The changes will require dedication and commitment right from the top. The changes will also require a truly professional service manager, a manager capable of planning the details and achieving results. Many dealers dislike our thinking concerning internal labor rates. Some dealers, we have discovered don’t even have internal rates, sales is billed nothing, nada, zilch for service work. We have found it works to start off by charging sales the same labor rate you set for your best customers.
So, what would be the results if all of the seven areas of improvement were accomplished? Our readers total dealership sales will run from a relative small outdoor power operation with a million dollars in sales to an equipment mega dealership of over $500 million in sales. Do the math on your own dealerships financial statement and observe the results. If your dealership last year had total sales of $10,622,648 and service accounted for 6.8% of your total sales, service sales would be $722,340. If your gross profit were 45%, you would have gross profit dollars of: $325,053. If you increased service sales by a mere 10% of total dealership sales, you would have service sales of $1,062,264. If at the same time, you pushed your overall margins up to 50%, you would then have a service gross profit in dollars of $531,132 or an increase of $206,079 in gross profit dollars. That is undoubtedly one method of improving your shop’s profitability.
Let us assume the same dealer had 12 technicians working eight hours a day, five and half days a week, times 52 weeks a year, this gives the dealer 27,456 paid out hours a year. Multiply this by the dealers $45.00 true hourly labor rate and we have an ideal potential service billing of $1,235,520 versus his original service sales (from the financial statement) of $722,340, which equals a 58% service billing efficiency.
Assume this service department adjusted its’ billing efficiency by 5% to 63%, while at the same time raising its’ labor rate by $5.00. Now what happens on the same amount of total billable hours: 27,456?
27,456 multiplied by the new labor rate of $50.00 gives the dealer potential labor sales of $1,372,800. The new billing efficiency is 63% and therefore, the department through improved efficiency and an increased labor rate has increased service sales to $864,864, or an overall increase of $142,524.
These are simple financial exercises to illustrate the typical equipment dealer’s potential service opportunity – what we refer to as unrecognized service profit opportunities. Your dealership can, and should, eventually accomplish all seven steps, but as you can see from the two examples, achieving three or four of the objectives or a combination of the objectives can be extremely profitable for any operation.
Become a pioneer in the coming years; focus upon your true opportunities. Head out for the new frontier and increase your profitability accordingly. It certainly can be accomplished if the commitment is made. Things that do not change will continue to remain the same!
Our special offer to dealers this month is our document entitled: Fourteen Steps to Increase Product Support Sales! Email us your request with the name and address of your dealership and your position within the dealership and we will email you this document and you will be invoiced $14.99 only payable if you are satisfied. Email us at [email protected]
John R. Walker is president of After Market Services Consulting Co. Inc. E-mail [email protected] to contact John.
