When I was teaching the Sonic Dealer Academy from 2001 through 2008, my co-instructor, Steve Hallock, became famous for asking each class why they thought we spend so much time talking about the service department. He would explain that it’s because, at a 75% gross profit margin on labor sales, the service department offers, by far, the greatest incentive to increase sales. "So why bother?" Steve would ask. "Because it’s only75 cents in gross for each dollar we sell!"  At that point in time, many automotive dealership owners and managers looked at service gross potential that way.

These days, however, during our NCMi^® classes for general managers, service managers, and financial management professionals, we teach the attendees to also recognize the value of the “associated gross” that is developed when we increase service labor sales. For instance, one of the "What if" exercises we perform in each class is, "What if…you could achieve small, incremental increases in sales margins on customer-paid repair order sales in your service department?"  The students quickly grasp how adding five more R.O.s per month, increasing hours per R.O. by two tenths, and increasing the labor rate by $0.50 can increase labor sales. And they are always absolutely shocked by the increased overall gross profit.

What do I mean? After performing this exercise with hundreds of NCMi attendees, the faculty can, without question, attest that when the associated gross profit from parts, tires, fluids, sublet repairs, and shop supplies is added to the labor gross, each dollar of customer-paid labor sales is worth, on average, $1.25 in fixed gross profit. I said “on average.” We’ve seen worksheets with results as low as $1.05 and as high as $1.50. Do your own calculations, unless you’ve done it before. You’ll probably be as amazed as the NCMi attendees!

This exercise has an important and even more astonishing final step. Once the overall incremental gross profit improvement (IGPI) has been calculated, we ask the attendees to think about how much of this IGPI will be retained as departmental net profit improvement (NPI). Once the attendees have considered the expense accounts that are likely to be affected by their proposed methods of increasing sales and gross, they normally predict their net profit retention to be in the 65% - 75% range. Let’s use 70% as an example. Based on everything I’ve said so far, each additional $1.00 of customer-paid labor sales will be worth, on average, $0.875 in net profit. ($1.00 in labor sales = $1.25 in fixed gross x 70% retention = $0.875 NPI.)

Last month, at a service management training program I co-instructed in Washington, D.C., a dealer-operator with an extensive background in fixed operations said to the class, “In all the years I’ve been in the business, I never looked at it this way!” Have you ever looked at it this way? Don’t you think you should?