What is Your Revenue Capacity for Product Support?

How do you know what volume or capacity of parts and labor sales are in the market?

By John Dowling

Market share is a valuable number when it comes to whole goods sales, but what about product support? How do you know if you are penetrating the market regarding parts and service sales? Margin tells you if you are profitable in the sales you presently have. Technicians’ recovery tells you if your technicians/service department is efficiently completing service work. Inventory turns and fill rates tell you how efficiently your parts manager manages your current inventory dollars. But how do you know what volume or capacity of parts and labor sales are in the market that you are not capitalizing on? Now, that is a scary question. Some dealerships have significant margins, awesome recovery rates, fill rates, and perfect parts turns, but they’re not capitalizing on their market.  They are missing revenue capacity, and they do not even realize it.  

How many technicians do you need? What should be your parts inventory levels? Many dealership managers base their parts and service numbers on historical data, a reactive approach. They look at the service work they did last year and add a percentage to it. Parts managers often do the same with their inventory levels. But what if you could be more proactive? What if you could plan for growth and efficiency rather than just reacting to past performance? This shift in mindset can empower you to take control of your dealership's future.

What about overall performance? Numerous metrics can indicate how profitable or efficient your dealership is with its current parts and service business. But what about the business you're missing? What's the potential volume of parts and service business that ought to be yours but isn't? If you're only tapping into a fraction of your market, it doesn't matter how efficient or profitable you are; you're still missing out. Your competitors gain from your inaction, and you may not even realize it. This potential loss should raise concern and serve as a strong motivator for change.

John Dowling, Author, Speaker, Consultant, and Co-Founder of By The Boxes

Budgeting. How many of us truly enjoy working on a budget? A more relevant question is, how many of you actually create a budget or a yearly forecast for the upcoming year? Some dealerships don’t even have a monthly forecast or budget. They might say, “Well, the numbers are what they are. There’s not much we can do about them.” These are the dealerships that end up getting acquired, bought out, or, worse yet, going bankrupt.

There is no perfect number or KPI that can answer all our questions. In reality, the numbers only raise questions, and it is our role as managers to investigate them and provide answers. However, there is one number that poses the right questions to help us find solutions to the issues mentioned above. It may not be as well-known as other numbers, but the sales mix ratio has been an invaluable resource in my career. As I mentioned, no number is perfect.

Nevertheless, the sales mix is instrumental if you have a high-performing sales department with a substantial market share. So, what is the sales mix? The sales mix refers to the percentage of overall gross revenue each department contributes. Depending on your industry, rough estimates would be 10% for service, 20% for parts, and 70% for whole goods. This number is significant because it indicates whether you have a balanced operation. Are you overly reliant on one department over another?

Now for the sales guys out there who are saying, “Look, sales does the heavy lifting.”  Let us not forget that revenue is not profit margin. Revenue is great, but being profitable is more important. As a reminder, sales margins range from 0% to 10%. Depending on your industry, you may even get up to 20%, if not higher. Also, most dealerships do not accurately account for their actual cost of sale. They force the parts and service departments to take a hit or loss to inflate their sales margins. This ensures that they overpay sales commissions to their salesmen and sales management.  Parts margins typically should be between 30% and 45%, and labor sales should have a 60% to 75% margin. Once again, these are general numbers, and your industry or geographic location may dictate higher or lower numbers, but these are a good rule of thumb.

Let us discuss market share and how it relates to the sales mix. As stated before, the better your sales team performs regarding market share, the more effective and accurate your sales mix number will be. For the sake of this article, let us say you have a high-performing sales team, and they are killing it. If you do not know your market share, ask your OEM Territory Sales Rep. They would love to talk with you about it.

If you have a top-performing sales team and your service sales mix is 10% to 15%, you may have topped out and saturated your market share in service sales. Theoretically, to continue growing your service business, you would have to go outside your market and start servicing all makes.

You are not fully leveraging your market if your sales mix is below 10%. This does not imply that your service department is underperforming; other factors may impact this number. Before approaching your service managers to hold them accountable, ensure that your labor rate is competitive with the market. An excessively low labor rate can adversely affect your sales mix figure. Additionally, if you have an internal labor rate for rentals, sales, or make-ready services, it will understate your sales mix number and harm cash flow and profitability. The labor rate and the decision to maintain an internal labor rate are issues that must be addressed at the executive level. The service manager has no control over these factors. This remains an executive-level concern that executives must manage.

How does the sales mix number relate to overall performance? If your service department is hitting its budget sales numbers, margins are 60% to 75%, and the recovery rate is over 85%, you may say that your service department is high-performing, and that may be true. But if it is a genuinely high-performing department that is underperforming, are you not still losing money? If your high-performing service department only takes advantage of 25% of the market, wouldn’t you want to know and ask why? If the service department is hitting all their numbers but company profitability is not there, look at the sales mix number. You may have a service throughput issue if the number is less than 10% and your labor rate is in line.  

How many technicians should you have in your service department? If you don't have enough technicians, it can lead to a throughput issue. Conversely, too many technicians will cut your margins due to payroll costs. Some dealerships determine the number of technicians based on the level of customer complaints they receive. More customer complaints result in hiring more technicians. This is not an innovative approach. Another method some dealerships use is to assess how much overtime their staff is working. If they consistently work extended hours for three to six months, they may add a technician or two to see if it alleviates the problem. While this approach is better than the first, it's still not ideal.

We will use the sales mix number to determine whether we have a throughput issue and how many technicians we should have in our service department. For example, if your sales mix number was 7% last year, and your goal is to reach 10% this year, see the charts below for our example.

Depart.	Current Revenue	Current Sales Mix	Desired Revenue	Desired Sales Mix
Sales	$160,000,000.00	70.86%	$160,000,000.00	68.38%
Parts	$50,000,000.00	22.14%	$50,000,000.00	21.37%
Service	$15,800,000.00	7.00%	$24,000,000.00	10.26%
Total	$225,800,000.00		$234,000,000.00
		Required Additional Revenue
		$8,200,000.00
Labor Rate	Number of Techs Required	Number of hours	Recovery Rate	Additional Revenue
$175.00	27	2080	85%	$8,353,800.00

In our example, the total revenue for the dealership is $225 million, and service contributed $15.8 million, resulting in a 7% service sales mix. To increase this to the desired 10%, the service department must boost its revenue by $8.2 million. To keep things straightforward, we will not consider overtime hours and assume the dealership operates on a regular 40-hour week (which I know is not the norm for most dealerships). The average hourly employee works 2,080 hours a year. This makes it crucial to understand your recovery rate. This dealership performs excellently in service, achieving an 85% recovery rate. Therefore, taking 85% of 2,080 hours gives us 1,768 billed hours annually. Multiplying our billed hours (1,768) by the posted labor rate of $175 results in $309,000. Dividing the required additional revenue of $8.2 million by $309,000 reveals that we would need an additional 27 technicians to reach our goal of a 10% sales mix.

What did we learn from the above exercise? First, the dealership is losing $8.2 million in revenue potential. Remember, this refers to service labor sales; with a 65% margin, that would amount to $5.33 million in gross profit.

I’m not trying to make this sound too easy, but it is straightforward, and we now have a starting point. We know we have $8.2M in revenue capacity in our current market. The question now is: Can we take this from our competitors? Do we have the facilities and management team to hire and oversee an additional 27 technicians to reach the 10% sales mix target? 

This is where the executive team earns its money, and strategic planning becomes essential. Most dealerships likely do not have facilities large enough to accommodate an additional 27 technicians. However, if you have ten different locations, it would only require two or three additional technicians per location. But it’s not that simple. We need to analyze the sales mix for each individual location. We don’t want to risk adding two or three technicians to a location that already has over a 10% sales mix. That would waste time and energy, not to mention payroll dollars. Once we conduct the sales mix analysis for all ten locations, we will identify which has the revenue capacity or market to support additional technicians.

Once we have determined and selected the locations to add the additional technicians, we need to consider the following question: Can those facilities physically accommodate two to three, if not six to seven, additional technicians? If the answer is no, are we planning to build or relocate to a larger facility? Do we have the cash or credit to construct a larger building? Does it make financial sense to spend $10 million to $30 million, if not more, to generate an additional $8.2 million in revenue annually? As the dealership owner or executive, that is the decision you must make.

If you’ve decided that spending $30 million to make $8.2 million isn’t worth it, that’s the decision you have to live with. However, there's still $8.2 million in revenue in your market that you’re missing out on. Another approach to capturing that $8.2 million is through field service. Field service will always be in demand, especially as equipment continues to grow in size. You can purchase a field service truck for between $150,000 and $200,000. Buying 27 field service trucks would require an investment of only $4.05 million to $5.4 million. This may sound significant, but keep in mind that a 65% margin on $8.2 million is $5.33 million. You would recover the cost of the service trucks in your first year. Assuming the service trucks last for ten years, that amounts to $53.3 million in gross profit. That is a substantial sum and enough to build that $30 million facility and pay for it in cash.

I hope you see the sales mix ratio value regarding revenue capacity, throughput, budgeting, and forecasting. There is still one last issue: finding and hiring 27 technicians. But I have discussed that in another article (Link to my article in the AED magazine Strategic, Not Tactical: Technician Recruitment and Retention https://aednet.org/archive#flipbook-df_14760/27/).

P.S.

I have recently partnered with Kevin Landers, President of Rocketwise, inc., an IT consulting company. We have launched a new company, By The Boxes, a software development company, and we have developed a work order tracking app that will track every stage of the work order. You instantly have visibility to see how many days it takes you to move a work order from stage to stage or box to box. The By The Boxes work order tracking app will be a game-changer in our industry. To schedule a demo, email  john@bytheboxes.com or kevin@bytheboxes.com.