Generating Service Dept Profit While Growing Your Retention

We probably all agree that the goal of the dealership service department should be: (A) generate profit and (B) deliver the experience that keeps customers returning.

What we probably won’t agree on is the order of those objectives. Does a focus on A dilute the opportunity for B – and if the focus is first on B, does the service department leave money on the table?

Maximizing Opportunities

“It’s about both of them, and we’ve set ourselves up to create and maximize opportunity for our eight stores from both objectives,” says Kerry Monica, director of Fixed Operations for the Lester Glenn Auto Group, with headquarters in Toms River, N.J.

He says the group focuses first on creating the right customer services, which includes using a dealer-branded prepaid maintenance plan to drive repeat service traffic that’s also driving service growth and lifting R.O. dollars. 

It’s said it costs the dealer $50 to $80, the R.O.’s percentage of dealership overhead, every time service opens a repair order. An advisor should write 15 to 20 R.O.s a day.  A LOF service goes negative when additional services are not recommended to and accepted by the customer.

NADA’s 2016 Dealership Productivity Guide notes target retail hours per R.O. of 1.5 to 1.7 is average for shops where quick lane work is factored in, and 2.0 to 2.5 hours otherwise. A service generating 1.5 hours at a $95 labor rate is $142.50, excluding parts. Subtract the overhead cost to open the R.O. and the actual revenue generated is, theoretically from $62.5 to $92.50, depending on the dealership’s overhead.

The industry goal is 3.0 hours per R.O., so most every shop has room to improve.

The $64,000 Question

One-way dealerships promote increased service activity from their customer base is by incentivizing customers to maintain their vehicles at their location, and at an increased frequency per year. Yet the question remains, should service focus on generating profit or an experience that drives customer retention.

The winds are changing from days when the focus was all-out on up-sell in the service lane, industry observers and dealers note. They say that perspective started changing in the mid-‘90s. Observers wondered how the Japanese imports kept customers coming back when domestic vehicle owners seemed to disappear with the end of the factory warranty.

The short answer is those dealers stopped focusing on grabbing every nickel and dime and instead directed service toward developing trust in a fast experience. When customers believed their vehicles needed attention, they returned to their dealership and not the aftermarket, notes Lou Aronica, who brings 45 years in the business, most recently as a retail parts and service consultant with MSX International.

To manage a service department to optimize revenue is smart – if the strategy is right. Otherwise, notes Aronica, it plays into the false preconception that dealerships are more expensive.

“Customers are more interested in getting in and out quickly than about your advisors looking over their car,” Aronica says. “They come back because of how they’re treated and the perceived value of the service.” 

Price May Not Drive Customers Away

He notes how one manufacturer provided five free oil changes at its dealership with the purchase of a new vehicle. However, customers returned on average for fewer than three of those services. “Obviously, price was not the reason for the lost retention,” Aronica notes. 

Both revenue and retention opportunity suffer, he says, where the service department pushes advisors to upsell in the lane during the R.O. creation.

“Sell them a wiper blade in the lane and you can forget about selling them a cabin air filter later -they’ve made their extra purchase for this trip and their perception is that you are now piling on the sales to maximize the repair order.”

Aronica advocates that service selling should not start with advisors, but always follow the multi-point inspection.  He suggests:

• Advisors, to build credibility, should focus on “selling” the value of the multi-point inspection, which includes such items as checking and topping off fluid levels and correcting tire pressures, especially the spare. “I don’t want the customer thinking initially that this multipoint recommended safety inspection has anything to do with money,” Aronica says. The goal is to build value, appreciation, and trust in your recommended services.
• Advisors should quickly present inspection findings using specific measurements – remaining brake pad thickness results, coolant level readings, battery cold crank amperage readings, etc. “Then,” Aronica notes, “when you go to up-sell, the customer is more accepting because you are only selling once, and they see the value in all you’ve already done for them. Don’t sell in the service lane; it’s counter-productive.”

Monica says Lester Glenn’s shops practice a similar philosophy. Advisors do no selling until the inspection report is in the advisor’s possession. “The only upsell they’re allowed to do before the inspection is: one, to upgrade LOF customers to synthetic and, two, because our drive includes drive-on tread measurement, rotation, and alignment testing, advisors upsell those findings,” Monica says.

Value of Dealer-Branded Prepaid Maintenance

Part of this auto group’s R.O. growth strategy is the use of a dealer-branded prepaid maintenance program. The plan includes free LOF services for the first two years of vehicle ownership, which buyers in F&I can upgrade to either a three or five-year plan offering synthetic motor oil changes, key replacement services, and tire rotations.

“From the sales end, offering these programs keeps buyers in the Lester Glenn family, and it’s a proven fact that where someone has their vehicle serviced is where they’re most likely to buy their next car,” says John Perillo, Director of Variable Operations for Lester Glenn Auto Group. He said even in his market where lease penetration is about 60 percent, the dealer-branded maintenance program keeps those customers servicing those cars with his dealerships.

Even with such lease penetration, 10 percent of buyers purchase a prepaid maintenance plan through the stores’ F&I process. Perillo’s penetration goal is 20 percent but given the program has been offered just a year, he is satisfied with results.

“The group writes about 7,000 customer-pay repair orders a month and about three thousand of those are customers coming in for an oil change, whether part of our complimentary two-year plan for all buyers or from purchasers of our prepaid maintenance plan,” notes Monica. “We’re upgrading 30 percent of them to synthetic motor oil. On average, from the two or three-year paid plans, we’re averaging $200,000 a month in upsells or about $75 per R.O. If we didn’t have this retention tool in place, those 3,000 customers might not have come in.”

Lester Glenn’s dealerships experience tracks with many other dealers using such a tool to increase customer retention and service growth.  Across the board, these dealers’ first-year plan use retention can be as high as 85 percent and year two and three retention 65 percent each. They also report, on average, $70 upsell per repair order.

“I think prepaid maintenance plans are great for promoting retention. In my experience, what drives the success of these packages is they help create more opportunities for a good experience at the dealership for the customer, especially if they include a tire rotation” says Aronica.

“When we look at what’s flowing out of this, we’re gaining an R.O. increase, better retention, and new vehicle sales,” concludes Perillo.

All or part of this article originally appeared on CBT