By Ed Kovalchick, CEO & Founder, Net Profit Inc.
Let’s face facts, our fixed ops margins are generally blah in some accounts. In my many years of traveling, I have had the opportunity to view financial statements from various industries, as well as having discussions with numerous wholesalers and retailers from industries/businesses other than franchised retail automotive. What struck me often was the difference in some of the gross profit margins others enjoyed, commonly to offset areas where the margins were minuscule, so that the overall result was nicely profitable.
A simple example is one most automotive sweat-hogs like me can relate to – booze. Think about what one pays for a lousy ounce or so of bourbon in an eatery/bar/juke joint versus purchasing an entire liter-sized bottle of medium quality smack at the local boot-legger. It almost feels illegal, but we lay the bucks down anyway so we can hang out and whine to our cronies. Blah, Blah.
The good news is that with a little configuring, we can bump our meager margins too. Like other businesses, we have items that carry different “value perspectives” to the purchaser. For instance, those oddball, I-need-it-now-4.89 differential ring and pinion gears deserve a heck of a larger markup than a common engine air filter. Here, the ring and pinion represent the bourbon, while an air filter is scrambled eggs. The bottom line is that we just don’t do enough price nitpicking, but rather we often tend to stick to the so-called published MSRP.
“The overall experience is the real driver of loyalty, not price. Don’t give away what isn’t accomplishing anything but a crummy margin.“
Labor Beat Down
The mechanical effective labor rate falls into the same pricing trap. While we take a proverbial ELR beat-down on basic service packages, especially when we are coerced to pay inflated pricing (some not all) manufacturers charge dealers for common maintenance items, we have opportunities to make up the difference elsewhere.
Unfortunately, too often, we don’t take the time or effort to do it. Consider the massive overhead franchised dealers are strapped with – oh, we need another remodel – new factory management – groan. When I explain to employees that we need to generate a half-million dollars in gross profit every four weeks just to pay the company bills, they can’t believe it. And that isn’t even a large store. Consider the literally thousands of dealerships that have closed over the years – there are less than 17,000 now. In 1950, there were some 49,000 outlets – how’s that for a poke in the financial eyeball?
Robbery Not
Re-examining your pricing strategy isn’t about ripping anyone off. Although, if you haven’t been exposed to the markup, on clothing for example, at cost times three or four or even five, while the aforementioned where-the-moon-don’t-shine factory MSRP is usually 67%, not even one; you may feel they are being somehow unfair – not so when you compare our meager pricing strategies versus other commerce.
Get this: I traveled with a tennis shoe wholesaler a while back who said he paid $18 per pair in quantity from Asia, no matter the made-up retail price. I asked about the higher-end $150 sneakers – “all the same,” he noted. Really!
Think about the so-called “Sales” other businesses have: Half-price this weekend, Save 70% now till the end of the world, etc. My best guess is, they aren’t losing money on these deals; besides the idea is for you to spend money on the x4 markup stuff too lad.
Costly Cost
Another huge factor in margin management is the cost of goods and labor. I am very aware of the need, wanted or not, to be loyal to your franchise, which includes paying the price for parts no matter what. But every part going out the door isn’t tied to that franchise. Aggressive managers find they can do a nice volume in other makes from loyal customers as well as the used vehicle department. These smarties negotiate with a local parts supplier to get the lowest cost on tier one parts and quality supplies, plus early pay and volume discounts to boot up to at least 7%.
I have seen as many as ten levels of discounting from some suppliers (in the old days they ran out of paper colors), but if you don’t negotiate, you don’t get – why would you? This includes bodyshop supplies and hardware, as well as pricey chemicals. When you buy it right, a fatter markup is in order, which sweetens the gross profit margin. I have personally presented purchase loyalty options to suppliers for dealers, which ended up shocking management regarding the substantial discounts we achieved. You can do this too; it isn’t rocket science.
Have a Clue
What really determines what we can charge for what? Hey, how about the competition? Let’s face it, we are generally lax in our market studies, which we probably should be doing about every six months. Many times, I have my clients survey the prevailing market pricing, and we discover that we are the cheapest around on some common items. All that is accomplishing is driving down the meager GP percent.
Cheap pricing isn’t driving retention, being fair-priced is all customers ask for (except for the loser/whiners you don’t want). The overall experience is the real driver of loyalty, not price. Don’t give away what isn’t accomplishing anything but a crummy margin. Hey, market a $9.95 oil change and see what happens – you likely won’t do it twice. (Note: have hazmat suits readily available if you do).
Juice Time
It’s time Big Boss. Hopefully I have your juices flowing a bit concerning picking up some additional GP margins here and there. To that end, I made up a three-part Excel workbook to play with to get you even more enthusiastic. I did all the work, so all you have to do is plug in some numbers to see what happens. Think out of the “pricing box” dealer managers were dropped into long ago – you know, the one you inherited. For a copy of the workbook, email [email protected] with “Parts-Labor-Sublet Price Matrix Testing” as the subject line. It’ll be fun, but caution, don’t let your kid get a hold of it – he or she will ask for a larger allowance for sure.
ARTICLE BY Ed Kovalchick
Ed Kovalchick has traveled the world training and consulting in fixed operations for manufacturers and dealers. His extensive background includes master technician status, independent shop owner, dealer with all Chrysler & Nissan franchises, and founder of Net Profit Inc. He is a graduate of the University of Louisiana and has served as state president of the Automotive Service Councils, and the advisory boards of WyoTech and Virginia College. He has been a regular columnist and conference presenter with Dealer Magazine since 1995.
Featured Digital Dealer Orlando Session:
12 Fundamentals That Drive Customer Retention in Service
Next month, Ed Kovalchick will present at Digital Dealer Orlando, providing critical insight on improving retention of service customers, using no-cost or little investment fundamental strategies. Dealers are losing up to 40% of the customers and the potential service and parts revenue the very first year because simple, yet effective retention steps are never completed. This session will reveal and review these steps in detail and give you some resource/support materials to get the programs moving upon return to the dealership.
Key takeaways
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Set important customer retention methods in place effectively.
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Maintain the service retention methods installed.
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Use numerous no-cost vital methods to develop service customer retention for those now lost in the beginning.