By Paul Stern – Founder, Liftnow
Since as early as the 1950’s, the term absorption rate has been used in many different ways, with different groups of people and experts, changing the term’s criteria for success over time. Most recently, absorption rate is defined as “Can the profit from my service department cover my overhead in my entire dealership?” For example, an absorption rate of 80% means that 80% of the dealership’s expenses are being recouped in the service department alone.
Dealerships are now understanding that not only can they cover most or all the expenses from their service department, they can actually turn an overall profit before a single car is sold or leased. Behind financing, service is now the most profitable area in a car dealership.
To understand more about the present and future of absorption rates, we must look to the past. From the 1950’s until the early 2000s, the car dealership’s service area was ancillary to new car sales. Oftentimes, it was tucked away behind or to the side of a car dealership. In many major cities where space is an expensive commodity, many dealerships opted for no service area at all- car sales is their business after all, right? Wrong. The last 20 years has seen an incredible amount of car dealerships not only investing in their car dealerships but trumpeting them.
The customer has also changed drastically in the last 20 years– not only does the existing fleet get older, but more individuals want a one-stop-shop or a “hassle-free” solution. In other words, they want to buy, finance, service, and even sell the car at the same dealership. Consumer search volume for “car dealership service” has increased nearly 700% since 2007.
You can thank the rest of the world for changing customer expectations, standards and tastes. There’s a 60% chance you’re reading this on a handheld device that also takes its own photos, videos, plays its own music, and can access hundreds of thousands of applications. For those dealers that can retain and capture the customer at every step, the more profit a dealer can expect.
In the last 20 years, since car dealerships have become aware of the importance the service department plays in the role of customer retention and lifetime customer value, they defined a “mediocre” absorption rate, and a “successful” absorption rate. Industry reports and news articles commonly define a mediocre absorption rate at around 60-70%, while a “successful” absorption rate is around 85-100%, with 100% being an elusive and rarely attainable goal. There are even whispers of absorption rates exceeding 100%.
The downside of a poor or mediocre absorption rate is twofold. You’re not only too reliant on sales as a means of profit, but you’re also too vulnerable to sales volatility– if you have an especially bad month and your absorption rate is 60%, you’re likely operating at a loss. The real shocker is that the average absorption rate among car dealers is only around 58%, which means that car dealers have real work to do. How do you achieve a successful and even “unheard of” absorption rate?
Firstly, know your monthly and yearly absorption rate, and develop goals in the short, medium and longer term. Want to get to 100% absorption, but you’re at 60%? Don’t expect the jump to happen in a year, as the difference means changing processes and technologies. A more realistic goal is a 10% annual growth in absorption rate for 5 years. Communicate your goals to your team – that means your service manager, your parts manager, your body shop manager (if you have one), and all of their technicians and colleagues. Track weekly and monthly goals with them and incentivize top performers — even friendly competition is encouraged.
Secondly, change the process and technologies in your service area. If you want the service area to cover the expenses of that beautiful showroom, make sure your service drive matches. A clean, well-kept and state-of-the-art service facility will encourage customers to revisit and repurchase. Make sure you’re investing in equipment that is not only beautiful, but gives consumers as much information as possible, and gives you the opportunity to sell based on that information. Finally, educate your service manager and advisers on the technology’s capabilities, along with ways to convert those capabilities into sales. Some dealerships even give service writers additional compensation for performance metrics, such as alignments sold.
Paul Stern is the founder of LIFTNOW, the largest automotive equipment distributor in the Northeast. LIFTNOW sells leading lines of automotive equipment, including Hunter Engineering, to car dealerships. He can be reached at email@example.com or 1-800- LIFTNOW (543-8669)