Service, the dealership’s last profitable frontier!
Throughout the last two centuries, we have all heard comments about man’s last remaining “frontier” . . . outer space, the oceans’ depths and the third world countries. For the equipment dealer, one of the last remaining frontiers for profit is the dealership’s service department.
For those 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. Unless you are a rental operation, we contend that half the battle is a true belief that the opportunity exists to make a profit in any service department.
Year-after-year we continue to study the Cost of Doing Business Studies for all types of equipment dealerships. Year-after-year we continue to see average shop losses running in the area of six figures and we continue to ask why?
Is it because the typical dealer’s background is sales oriented? Is it because the manufacturers typically neglect to encourage their dealers 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, and have to market the dealership’s service with the same enthusiasm and intensity that is required in marketing equipment?
We can continue to think negatively about our service department opportunities or we can do the reverse and take a completely positive attitude toward service. It is the equipment dealer’s last opportunity for (extremely) 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!
Within the last frontier of profit opportunity, your dealership can control its own destiny! It is your decision to do so! Make up your mind as to whether or not the glass is half empty or half full! It is time to wipe out the red ink in your service department and improve the dealership’s overall profitability.
Here are some specific steps to consider in order to create your dealership’s turn around. 1) Set up your shop as an individual profit center, a department that covers all of its expenses and has a chunk left over for the dealership. 2) Eliminate all of your shop internals, most internals are nothing more than sales discounts anyway. Discounts which the sales department did not earn. 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 technicians Service Billing Efficiency. Determine your percentage number. Whatever 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 again your increased profitability of an additional 5% to 10%. 7) Last but not least, if again you are not interested in flat rate, take a long hard look at your hourly labor rate. Don’t look at your labor rate through the eyes of the 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 90% 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 technician’s 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 $4.95 an hour increase every six months? Sound reasonable? Many 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 $15 to $20 dollar increase after five years of no increases 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.
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 certainly one method of improving your shop’s profitability.
Let us assume the same dealer had 12 technicians working 8 hours a day, 5.5 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 hour 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 raised their Billing Efficiency by 5% to 63%, while at the same time raising their 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. 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 this century. 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 remain the same!
Key, if you are to be a “player” on the frontier of successful service sales, it depends on how you market your service. Over the past five years we have written numerous articles covering this particular topic. We have also written the manual entitled: Service Marketing. This 68 page manual covers everything you need to know in order to increase your marketing of service. Hundreds of dealers have greatly increased their service sales by reading and implementing the best practices offered by reading this manual. It can be ordered by emailing us at: [email protected]. You will be invoiced $16.95 an amount you can pay by check only if you are satisfied with the contents, once you receive the manual by email. Please provide us with your name, title, dealership name and line of products. Your satisfaction is guaranteed . . .
John R. Walker is president of Aftermarket Services Consulting Co. Inc. E-mail [email protected] to contact John.
