Of the KPIs your dealership must focus on, gross profit percentage should never be overlooked. To improve the gross profit percentage, your service department must do more than simply add more work to the repair order, although this can be part of the equation. While we will examine this option, we will look at a few more innovative ways you might not have thought about.
The gross profit percentage is figured out by taking the total amount of labor revenue on a repair order and subtracting the amount paid to the technician. As an illustration, if you pay your mechanic $75 for a job that brought in $225, the gross profit from the job is $150. If you take this total and divide it by the original charge, you see that the gross profit percentage equals 67%.
The service manager is responsible for boosting the gross profit percentage, ideally to 70% when possible. However, some dealerships prefer to maintain a goal of 76%, which can be idealistic in some situations but remains a great target nonetheless.
Improve gross profit percentage
While there could be other ways to tweak the final outcome, these four methods offer the best place to start.
1. Increase lines per RO
The fastest way to increase the gross profit percentage is to upsell and add lines to the RO. This step also helps you earn more hours per RO. If you create bundles of services that customers can’t refuse, you are sure to boost the services you sell.
However, this step is only as good as the price you charge for the services and the effective labor rate. We will cover both of these in more detail.
2. Increase prices for services
If you are having trouble boosting the profit margin, you might need to raise the cost of the services. It helps to examine what other service departments in your area are charging for the same jobs. You can send a mystery shopper to get some pricing and compare it with your own.
If your pricing is already comparable, raising it might not be the best idea at this time. However, the other tips will still apply to you.
3. Set a reasonable labor rate
For services that are charged by the hourly labor rate, you want to be sure that you are in line with what is happening in your market. There’s a chance that you have priced the labor rate too low, which is causing your gross profit percentage to suffer.
Determine what the local market will bear. While calling around to get other labor rates can be helpful, it’s not the only way to determine what yours should be. After all, you don’t know if those other service departments are profitable and what their expense structure looks like.
When you set your labor rate, make sure it’s reasonable yet leaves plenty of margin for profitability.
4. Evaluate efficiency
If you can’t take the labor rate or price for services any higher without chasing away customers, you must take a closer look at the service department’s efficiency. By evaluating the flow of work in your shop, you can get jobs done in less time, thereby boosting the profit per standard RO.
Start with the parts department. How can this team have the inventory ready for the technician, so there’s less downtime? Additionally, you want to evaluate how the technician gets paid. If there are bonuses available for productivity, quality work might get done in less time.
For example, if you can raise the productivity of your paid-per-hour technician, you dramatically reduce the effective cost of labor. Your posted labor rate yields a much higher gross profit margin in return.
All of these steps are meant to be evaluated regularly, even when the gross profit percentage is in line. It’s always wise to re-evaluate the processes you are using and see where there is room for improvement.