Service Absorption is a Dangerous Number

Blog | October 31, 2017

Author: Scot Eisenfelder

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Service absorption is one of the most frequently cited Fixed Ops metrics at 20-group meetings. While asking the service department to carry store profitability has never been more important, focusing on service absorption as a metric is not only limiting, but dangerous to the long-term.

My primary issue with service absorption is that it’s composed of two unrelated measures and does not speak to a store’s achievement relative to its potential. Service profits are not substantially driven by store fixed costs. Most dealership fixed costs support vehicle sales, not service, so there is no reason to expect correlation between the two metrics. Therefore, the metric itself does not provide any guidance for how to optimize service profitability.

The underlying premise of comparing service profits and store fixed costs represents an archaic view of automotive retailing. Once upon a time, dealers could count on substantial warranty work and sufficient in-warranty customer pay business from new vehicle sales, so minor tweaks in fixed operations could achieve sufficient service profits to cover seasonal or temporary new vehicle declines.

However, front-end profit is in a permanent decline and very little service business is guaranteed due to less warranty work, higher quality vehicles, more replace-than-repair work and more aggressive independent aftermarket competitors. So, relying on historic approaches and goals is insufficient to achieve desired store profitability.

More importantly, achieving 100% service absorption doesn’t represent a store’s potential. Today, franchise dealers only capture 20 to 25% of the revenue potential from their Units in Operation (UIO). I would argue the focus on service absorption in part contributes to these results because many dealers are only focused on covering fixed costs, rather than competing on each revenue opportunity. This leads to tweaking service marketing and operations, rather than driving the more fundamental change required to wrest dollars from aftermarket chains or to more completely service vehicles.

Recent experience illustrates how dealers are falling behind. From 2010 to 2017, one- to three-year-old units in operation increased 48%! However franchise dealership service and parts sales increased just 41%! So franchised dealers lost share, indicating lost connectivity to consumers and vehicles, which will become increasingly important as new vehicle sales slow and margins decline.

As a dealer, you would be better served by focusing on service revenue per Units In Operation (UIO). Not only does this better represent the true service potential for the store, but facilitates more meaningful cross-store comparisons and diagnostics. Are underperforming stores not seeing enough VINs? Not seeing them with enough frequency? Not yielding enough revenue per VIN seen? Which operations are not being performed with enough frequency?

Most importantly, focusing on maximizing revenue per UIO creates a fundamentally different strategic and operating mindset where the dealer does not concede any revenue to the aftermarket. When focused on revenue per UIO, I encourage you to scrutinize all leakage points and determine what needs to be done to:

• Provide superior value and convenience to customers
• Engage in meaningful dialogue with consumers
• Alter processes to mimic consumer experiences elsewhere
• Leverage knowledge about customers and vehicle servicing needs

With such a view, additional investments in marketing, service lane technology, or loaner vehicles, are not measured as an expense, but against their impact on incremental service gross profit. With only 25% service revenue capture you could dramatically expand store profitability, no matter what happens to new vehicle profits. But only if you are willing to look beyond service absorption.

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