Margin compression continues—what can you do about it?
Car dealers are notorious for fighting through tough times. Their best right hook is more car sales, but there’s another way to punch back, which is to take some skin off margin compression by using cost and expense control.
“Trim” is the term usually associated with cost and expense control, but isn’t driving more opportunity from existing processes another way to accomplish the same results? It strengthens the bottom line and liquidity of the business.
Margin compression attacks from within and without. Every business should strengthen its foundations against potential leaner days. This means tightened overhead, consolidated suppliers, and pulling sublets—such as paintless dent repair and glass repair—in-house to keep staff busy and retain margin.
Scrutinize every process. Where you find opportunity leaking, either as an unnecessary expense or a lost sale, fix it. If software has the potential to make you money but is failing at that now, find out why.
It’s almost always worth revisiting vendors for help to tweak an application or get users retrained. Often a few hours of additional system training can turn mediocre performance into a TKO.
Here are seven punches any dealer can throw against compression to free up margin.
1. Service turnover
Failure in sales to conduct a professional and well-structured sales-to-service turnover kills retention. Dean Estep, former fixed operations training director for the AutoNation dealership chain and current managing partner at Next Level Automotive Group, says this is the point where dealers “stumble in establishing a long-term relationship with the customer.”
Cox Automotive notes that conducting this turnover results in customers being 2.3 times more likely to use that dealership’s service department.
2. Digital F&I
Regulations may crimp margin here too, but fight back. Studies by F&I technology provider MaximTrak show why.
Its most recent study, in 2015, conducted with 270 dealers across more than 1 million transactions using its e-menu technology, showed the digital platform responsible for per-vehicle retail (PVR) lifts of $538, and 52% product penetration lifts.
When more customers buy more products, especially ones like prepaid maintenance plans, tire and wheel services, and service agreements, you’re building retention and service dollars.
3. Data-driven inventory
Inventory management tools help isolate the right inventory mix and price points for your market, but sometimes all that data can put you over the top.
So along comes companies like LotPop, which provide virtual physical and online inventory management, analysis, and scoring to improve turn and sale margin. More units sold within 30 days of hitting the lot means more profit.
4. Recon faster
Keep an eye on at least two costs here: First, holding cost, which accumulates at an average of $32 a day per vehicle you own until you sell it, and second, over-reconditioning. Both accumulate to eat margin.
Dennis McGinn, CEO for Rapid Recon, pushes dealers to get vehicles through recon in three to five days to reduce holding costs and get cars to the frontline quicker. When done, cars sell faster for more gross.
5. Build retention
Stop wasting opportunity. Every retained customer is future service and vehicle business.
Many dealers kick-start retention by engaging customers with discount-priced dealer-branded prepaid maintenance plans they offer or sell in F&I.
Does it work? Our studies show the right plan can drive first-year retention by 85% and second- and third-year rates by 65%. They can boost customer-pay repair order averages by $70 each. They also:
- Drive consumers to the dealership, especially the service department.
- Deliver a positive experience so customers continue to come back.
- Have baked-in accountability tools to measure the lift in customer-pay dollars for each visit, so program ROI is measurable.
6. Draw in business
Service consultant Lou Aronica of MSX International says advisors who sell in the lane at check-in may trade nickels for dollars.
Don’t upsell customers in the service drive until techs have gone through their vehicles and report their findings. It’s by choosing not to grab for every penny that trust is built.
Both revenue and retention opportunity suffer, Aronica says, where a service department pushes advisors to upsell in the lane during the repair order creation. “Customers are more interested in getting in and out quickly than about your advisors looking over their car,” he says. “They come back because of how they’re treated and the perceived value of the service.”
7. Get the wanderer
Never give up on declined-service customers. Call them back the next day, the next week, and a month from now—they may not yet have attended to those services.
You may find them in a better frame of mind, with more time and even a little more cash. Consider offering credit services for repairs.
Tim Clay, chief revenue officer for Confident Financial Solutions, notes that the service provides a desirable alternative to credit card financing. He says that many dealerships report a 20% or greater increase in monthly service revenues because of signing up for the company’s service.
Times ahead may be difficult . . . who knows? Regardless, attending to these chores now helps remove waste and increase profit opportunities—both of which push back at margin compression.
Now’s a good time to pencil them into your action plan for 2017.
Latest posts by Ryan Williams
- How Bundling Retention Incentives Benefits Dealers and Consumers - July 30, 2018
- Maintain Your Service Department’s Effective Labor Rate With Prepaid Maintenance - January 30, 2018
- 5 Signs Your Dealership Is Leaking Customer Retention - October 4, 2017