Service Department Profit: Focusing on What Matters
A service department's income statement consists primarily of four key elements: sales, cost of sales, expenses, and net profit. Sales is sales of labor time, of course. That's the department's commodity as it were. Cost of sales is what it costs just to have that time available for sale. Expenses means the department's share of the overall store's expenses. And net profit, the “bottom line,” is what is left when the cost of sales and expenses are subtracted from sales. Service managers need to think about these four elements, and more importantly, they need to focus on those parts of the income statement they likely have the most influence over -- sales and cost of sales. That is, how many dollars come in, and how many of those dollars make it to the bottom line.
Service sales are affected by three things: the size of the department's customer base, the frequency with which customers return, and the per-ticket revenue. These are the easiest and most rewarding things to manage, and all are under the service manager's control. The first one, the department's customer base, is managed by the service manager by two tactics, customer relations and marketing. Effective customer service pays off in word of mouth, the best kind of advertising there is. Marketing on the other hand, for the service manager, means pursuing service sales. You do this by learning to overcome service sales objections and boning up on your upselling skills. You go after fleet maintenance and insurance jobs, and you make “get aquainted” calls to new vehicle purchasers, inviting them in for service. You also pursue service sales by adding value. If a shop has particular skills, the manager promotes them. This might be suspension work, dyno tuning, machine shop services -- any kind of work that puts the shop ahead of the pack, so to speak, and allows it to bill (and thus compete) on the basis of ability, not strictly price, an important advantage. The frequency with which customers return to the service department is affected by things such as followup calls, postcards, advertising, service specials, and customer loyalty programs. Per-ticket revenue is determined by effective service write-up, including the walkaround technique, upselling, menu pricing strategy, and proactive customer communication while the jobs are underway. All are vital.
Controlling the cost of sales is just as important as going after more sales, if not as much fun. It starts with managing the tech's wages, but also involves tracking and improving their efficiency, that is, each tech's percentage of actual to billed time. Even shop layout and service procedures affect cost of sales, which the savvy service knows very well. If the service department struggles with the cost of each billable hour it sells, the manager may need to implement an incentive pay system, and also to determine whether the shop's labor rate is adequate.
The service manager doesn't have to be an accountant to know how to take advantage of basic profit principles. These two things, sales and the cost of sales, are the service manager's keys to unlocking the real potential of a profitable service department, and he must learn to recognize, control, and work with these important elements.