A car dealership attaining 100% service absorption is like a ball player batting .400 for the season. It rarely happens, but it’s great when it does.
Improving service-absorption rates has become a hot issue as more and more dealerships turn to their back-end operations to offset reduced showroom activity amid faltering vehicle sales.
“Service absorption hasn’t been talked about in a long time, but it’s become a reenergized topic,” says veteran dealership consultant Steve Nickelsen of the Steve Nickelsen Group in Akron, OH. “Dealers are rethinking it.”
Service absorption is the percentage of a dealership’s total operating costs that the service and parts departments cover through their gross profits.
For example, if running a dealership costs $250,000 a month and the back shop makes $250,000 a month, the service absorption rate is 100%.
Achieving that level is a feat that requires a laser-like focus on the service department – a focus that’s often lacking from the many dealers who came up from the vehicle-sales side of the business.
“In Canada, the absorption rates are way down to about 40%,” says Nickelsen. “That is cause for pause.”
Some experts say service absorption should be at least 80%. In some exceptional cases, it surpasses 100%. That reaches a level of dealership nirvana.
Boosting absorption rates can be done in a different ways. Among them:
- Using customer-relationship management software for targeted, systematic marketing and promotional campaigns.
- Selling finance and insurance products that drive car owners to the dealership service department. Such products include extended warranties, maintenance plans and car-care appearance packages.
- Retaining existing service customers.
“How many dealers today know their service retention rates?” says Nickelsen. “Not many. Because in the past, they really didn’t need to know. And if you link retention to loyalty and loyalty to profits, how do you get them to come back?”
It’s not by offering 2-hour oil changes when nearby shops are doing it in 15 minutes. Dealerships must match that, which is why many of them have set up easy-in, easy-out auxiliary operations for fast maintenance and minor repairs.
Extra touches make a difference, too. Nickelsen tells of a dealership that improved service retention 12% by putting in a cafe for waiting customers.
“Retention is so important because it costs less to retain a customer than to get a new one,” he says. “Focus on the process and the customer experience.”
He cites this step-by-step progression: The right employees using the right process in the right facilities lead to the perfect customer experience every time. That creates loyal customers, even apostles. And those lead to more business and higher profits.
“Who are the dealers doing well these days?” Nickelsen says. “The ones doing those things.”