With the current supply/demand dynamics in the automotive retail sector, sales margins can be razor thin. Maximizing profitability increasingly hinges on optimizing the less conspicuous yet crucial aspects of a dealership’s operations.

One such cornerstone is the parts and service department, a vital revenue stream that is sometimes overlooked in favor of the primary focus on sales of new and pre-owned cars.

However, enlightened general managers and dealer principals understand that fine-tuning the parts and service departments can increase absorption, significantly bolstering the bottom line and overall profitability of any dealership operation.

The impact of discounting service hours and parts sales

While discounting service hours and parts sales can serve as a short-term tactic to drive service work volume and customer satisfaction, it is quite common that there is no policy in place that governs when, why, and how a discount should be offered. What exacerbates the issue – discounting is generally used as a customer pacifier, when it isn’t necessary.

What every general manager and service director should ask themselves, and know the answer to, is:

Do you know the true cost to your department and the dealership of giving away one hour of free labor?

General managers and service directors should assess the true cost to their departments and dealerships when offering discounts or free labor. Few understand the full implications. For instance, if your effective labor rate is $200 per hour, giving away one hour of labor generally requires selling an additional five hours at that rate to recover the lost profit.

This directly impacts the net profit, potentially eroding margins.

While discounting can indeed boost short-term service volumes and customer satisfaction, its indiscriminate use requires careful consideration as it otherwise has both short and long-term implications on profitability and the associated value of the work performed:

—Margin erosion: As explained, discounting service hours and parts sales will erode profit margins, especially when not balanced against cost efficiencies and productivity gains. While attracting and retaining customers is essential, it should not come at the cost of profitability.

—Perceived value: Constant discounting can inadvertently lower the perceived value of the dealership’s service offerings. Customers might come to expect discounts as the norm, making it challenging to maintain profitability without discounts.

—Staff morale and productivity: Incentivizing discount-heavy sales strategies can impact staff morale and productivity negatively. Service technicians may feel pressured to rush jobs or compromise on quality to meet discounted service targets, ultimately affecting customer satisfaction and retention.

Understanding the bottom line

General managers and dealer principals need to adopt a strategic approach that balances customer retention, profitability, and operational efficiency within the parts and service departments.

Here are some actions that can support that:

  1. Pricing strategy

Implement a pricing strategy that reflects the value of the dealership’s service and parts offerings. This may involve tiered pricing models based on service complexity, vehicle type, or customer loyalty programs rather than blanket discounts. Shop your competitors in the market to assess how competitive your dealership’s service and parts pricing is compared to other franchised dealers as well as specialty service providers such as Jiffy Lube, etc.

  1. Cost management

Focus on optimizing operational costs without compromising service quality. This could include negotiating better supplier terms, improving inventory management to reduce carrying costs, and enhancing service bay utilization to maximize technician efficiency. Consideration should be given to using parts runners, eliminating the need for technicians to waste time at the parts counter. If your technicians don’t produce 100% or more of their available time to “turn wrenches,” you’re underperforming.

  1. Customer retention

Invest in building strong customer relationships through exceptional service experiences rather than relying solely on discounts. Engage customers through proactive service reminders, and value-added services that differentiate the dealership from competitors. In this era where consumers are very comfortable texting, communications tools such as myKaarma enable technicians to provide the customers with convenient updates on the service work in progress; using video, the technician can suggest additional, recommended work. Customers generally accept these suggestions, which increases the work performed and the gross margin on each repair order.

  1. Training and development

Prioritize staff training. Every team member interacting with customers should adeptly represent your dealership and uphold brand standards—they are ambassadors. Consistently train and develop service staff to enhance technical skills, customer service, and efficiency. Well-trained technicians complete jobs faster and more accurately, boosting service bay turnover and customer satisfaction.

Set high standards. Train your staff to embody excellence, which improves overall performance in the service and parts departments. With new car sales challenges and rising inventory levels, it’s crucial to strategize and operate at a top-tier level dealership-wide. Educate customer-facing staff on delivering excellence, consistently.

Clients trust you with their vehicle needs, so staff must possess knowledge, skills, and confidence to explain why clients should choose your dealership. This includes highlighting benefits like factory-trained technicians, genuine parts, and explaining automotive systems clearly.

While price matters, clients often choose their servicer based on trust and perceived value. If they don’t see a compelling reason to choose your dealership for service, they may seek other options.

Independent shops can attract clients easily and once your client leaves you for an independent, you will struggle to win them back. Training your staff to effectively communicate the value associated with your services is crucial.

Your team’s confidence and integrity foster trust and loyalty. Ensure they recommend necessary services and explain their importance.

Customers trust their service advisors; they should be your strongest sales team. Equip them to communicate effectively and ensure they commit to continually recommend additional services, maximizing transactions and profits.

  1. Compensation plans influence behavior

It is my experience that when service advisors’, parts managers’ and service managers/directors’ pay plan is directly tied to the gross, or even net margin of their sale of service work and parts sales, or that of the department, as if my magic — discounting is much less prevalent.

If your parts and service departments continually under-deliver from a margin contribution perspective, you must ask yourself if you have the right compensation plan in place. It is amazing to observe how quickly discounting will be limited if the discounting directly affects the paychecks of those who extend the discounts.

Driving profitability through excellence

By adopting a strategic approach that emphasizes value, efficiency, and customer retention, dealerships can not only enhance their bottom line but also establish themselves as trusted partners in the automotive service industry.

Performing with excellence as a benchmark does require a disciplined approach that focuses on delivering an improved customer experience based on offering and delivering value – consistently. For some dealerships that poses a challenge. If your staff is not trained on what value you offer and what value you deliver, chances are that the path of least resistance will prevail.

Fine-tuning the part and service operations to deliver excellence isn’t just about immediate gains—it’s about laying a foundation for sustained profitability and growth in a competitive market landscape.

With over four decades of automotive industry experience, Sam Abergel impressive career began in sales at a Chrysler Plymouth dealership, where he was promoted to service manager within 18 months. Noteworthy achievements include leadership roles as the president of the Parts and Service Managers Guild in Los Angeles and representation on the Porsche North America Round Table. Sam’s extensive experience and track record of performance improvements includes orchestrating successful dealership transitions, managing and growing service and fixed operations as a transformative leader at Chrysler-Dodge, Audi, Lexus, and Porsche dealers. At Mach10, their clients benefit from Sam’s expert knowledge in driving dealership profitability through strategic guidance, coaching, and creating tailored client solutions.