Fixed Ops Journal - June 2019 - F26

FIXED OPS JOURNAL

PROFIT CALCULATOR

Here's a better performance metric for fixed ops than service absorption rate

I

ncreasing dealership service
revenue requires overcoming a
number of challenges: higherquality vehicles, longer service
intervals, increased competition from
independent repair shops and
shifting customer expectations. But
one of the main obstacles to growth is
an overreliance on service absorption
as a key performance indicator to
measure service profitability.
Service absorption gained
SCOT
prominence at a time when warranty
EISENFELDER
work and nominal customer-pay
retention covered fixed costs for
GUEST
dealerships that generated strong
COLUMNIST
new-vehicle profits. Times have
changed. Front-end profit is in
permanent decline. Now that fixed operations generate nearly half of
dealership gross profits, it's time to rethink the way we measure service
department performance.
Service absorption is calculated by subtracting a dealership's fixed
costs from its service department profits. This is problematic because
service absorption is composed of two unrelated measures. A store's
fixed costs don't drive service
"As a metric, service profits. Most dealership fixed
costs support vehicle sales, not
absorption is not
service, so there is little
correlation between the two
only limiting but
metrics.

"

"

dangerous to your
long-term growth."

A better way

And service absorption doesn't
measure achievement relative to
potential. Many vehicle brands have enjoyed high sales volume in
recent years; in fact, their sales volume has expanded faster than
service operations have grown. As a result, dealerships have 100
percent service absorption, so they believe they're doing great. The
reality is they don't have enough service capacity and are losing market
share to independent shops.
Finally, service absorption provides poor guidance. The only thing it
measures is profitability, but how much you make today has nothing to
do with how much you will make tomorrow. How can you use this
metric to pinpoint problem areas and opportunities? It doesn't give any
guidance on how to maximize service yield from current customers.
As a metric, service absorption is not only limiting but dangerous to
your long-term growth. It's time to replace it with a metric that better
measures service profitability.

Capturing service business
Revenue per unit in operation measures how much service business
your dealership is capturing. To calculate this rate, take the number of
vehicles you have sold in the past six years. Let's say you average 100 car
and truck sales per month. Over six years, that's 7,200 vehicles.
PAGE 26

JUNE 2019

Now calculate the total service revenue you have generated from
those vehicles in the past six years - not conquest customers, just units
in operation. Divide your total units-in-operation revenue by 7,200. The
result equals your current revenue per unit in operation. This metric
immediately gives you a measurable benchmark for improvement.
More important, revenue per unit in operation:
 Represents the true service potential for your dealership. What
percentage of service business from units in operation have you
captured? Most dealers capture just 20 to 25 percent of revenue
potential from their units in operation. That leaves a lot of room for
improvement.
 Gives dealers a better view of strengths and weaknesses. Are you
having a problem retaining service customers? Are you maximizing
service yield from every vehicle? Perhaps you're having trouble getting
customers to come in for their first service visit, or retaining their
business after their factory warranty expires. Revenue per unit in
operation allows you to identify problem areas.
 Facilitates meaningful cross-dealership comparisons and
diagnostics. In a group, comparing revenue per unit in operation can
identify problem stores. Are underperforming stores not seeing enough
unique vehicle identification numbers? Are they not seeing them often
enough? Are they not yielding enough revenue per VIN scan?
 Encourages scrutiny of all revenue leakage points. Revenue per unit
in operation shifts a service department's focus to providing superior
value and convenience to customers. It encourages dealers to engage
in meaningful dialogue with customers, change processes and take
advantage of knowledge about vehicle service needs.
 Provides better data on return on investment. New investments in
service marketing, service lane technology and loaner vehicles are no
longer measured as an expense, but against their impact on
incremental service gross profit.
 Perhaps most important, revenue per units in operation creates a
fundamentally different strategic and operating mindset, in which the
dealer does not concede any revenue to the aftermarket.
The good news for dealers is that since 2012, the combination of
increased new-vehicle sales and a 13 percent reduction in the number of
dealerships has created the highest ratio of units in operation to dealers
in industry history. The bad news is that a continued reliance on service
absorption is preventing dealers from taking advantage of this
opportunity to increase market share and service department revenue.
Scot Eisenfelder is CEO of Affinitiv, a marketing technology company in
Chicago that works with more than 5,500 franchised dealerships.
Fixed Ops Journal - June 2019

Table of Contents for the Digital Edition of Fixed Ops Journal - June 2019
