Of the KPIs your dealership should focus on, the gross profit percentage should never be overlooked. To improve gross margin percentage, your service department needs to do more than just add more work to the repair order, although that may be part of the equation. While we’re looking at this option, we’ll look at a few other innovative ways you might not have thought of.
The gross profit percentage is determined by taking the total amount of labor revenue on a repair order and subtracting the amount paid to the technician. To illustrate, if you pay your mechanic $75 for a job that brought in $225, the gross profit for that job is $150. If you take that total and divide it by the initial charge, you see that the gross profit percentage equals 67%.
The department manager is responsible for increasing the gross margin percentage, ideally to 70% when possible. However, some dealerships prefer to maintain a 76% target, which can be idealistic in some situations, but still a great target nonetheless.
Improve gross profit percentage
While there may be other ways to alter the end result, these four methods provide the best starting point.
1. Increase rows by RO
The fastest way to increase gross profit percentage is to sell and add lines to RO. This step also helps you earn more hours per OR. If you create service bundles that customers can’t refuse, you’re 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 these two in more detail.
2. Raise service prices
If you are having difficulty increasing the profit margin, you may need to increase the cost of services. It’s worth looking at what other service departments in your area charge for the same work. You can send a mystery shopper to get a price and compare it with yours.
If your price is already comparable, increasing it may 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 billed at hourly labor rates, you want to be sure you’re in tune with what’s happening in your market. It’s possible that you’ve set a labor rate that’s too low, causing your gross profit percentage to suffer.
Determine what the local market will bear. While it may be helpful to call for other labor rates, 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 setting your labor rate, make sure it’s reasonable while still leaving enough room for profitability.
4. Assess effectiveness
If you can’t increase the labor rate or price of services without driving customers away, you need to take a closer look at after-sales service efficiency. By evaluating the workflow in your shop, you can get jobs done in less time, increasing profit per standard RO.
Start with the parts department. How can this team prepare inventory for the technician, so there is less downtime? Additionally, you want to assess how the technician is paid. If there are productivity bonuses, quality work can be done in less time.
For example, if you can increase the productivity of your hourly-paid technician, you significantly reduce the effective cost of labor. Your posted labor rate in turn generates a much higher gross profit margin.
All of these steps are supposed to be evaluated regularly, even when the gross margin percentage is in line. It’s always wise to re-evaluate the processes you use and see where there is room for improvement.
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