Fixed Operations Metrics to Watch & Learn From
We've done a lot of blogs as of recent around various metrics within the fixed operations side of the business. We did one on unapplied labor because a lot of people ask for clarification about what drives this important metric. We also talked about effective labor rate, which received a lot of great feedback and questions.
While both of those are important metrics, three of the most important to watch closely and understand we’ll be covering today are: Customer Pay RO Count (number of customer visits to the dealership YoY); Customer Pay Labor Gross Profit, YoY; and lastly Customer Pay Hours Billed (also YoY).
Service Metrics to Measure & Manage: A Health Check for Fixed Operations
When it comes to service work there are three different types of metrics that we can measure – one for customer pay, one for warranty work, and the third is internal.
- Warranty; It is what it is -- purely a result of your manufacturer’s product quality or lack thereof, as well as recalls, etc. Depending on brand, warranty is up and down across the board depending on the brand. We don’t sell warranty work, so your control of this metric is limited.
- Internal is primarily the result of reconditioning used vehicles, the number of PDI's we do, and accessories that we sell through variable operations, but the reduced vehicle sales volume has had an impact on a lot of service departments, with recon being a little bit lower than normal.
- Customer Pay RO Count as an industry is up about 3% YoY through August of 2022. Typical industry growth is between 3 and 5% per year, but we're seeing a lot of dealerships experiencing negative trends in customer pay repair order counts, and this is a direct reflection of customer retention. To put that into perspective, if you have lower Customer Pay RO Counts this year than you did the prior year during the same period, chances are you may have lost as much as one customer for every new vehicle you've sold over the last 12 months.
It's that last bullet that is a grave concern to me. The majority of our service customers come from sales, and if we aren't selling cars then we're not getting customers, and right now we are in a downturn in vehicle sales due to volume being down. But even the customers we've sold vehicles to we're not retaining long–term, which could be catastrophic for service, parts AND new vehicle sales in the coming years.
Why Each of These Metrics Are So Important
Customer Pay RO Count
Effective labor rate and gross profit margin are all numbers that can be manipulated to a certain degree, based on how many hours are assigned to labor op codes and how the dealer accounts for cost of sales. Labor Gross Profit Margin is based on cost of sales (technician wages) and all things attributed to natural results of how we price our services in the market, how we manage discounts, and normal increases in cost of sales due to rising wages in our attempt to hire and retain qualified technicians.
But you can’t fudge Customer Pay RO Count. You either have customers coming in or you don’t. And, if you have fewer customers coming in this year than last, it’s indicative of a retention problem. Questions naturally come up about what we can do to influence CP RO Count...
- Capacity and scheduling: If we can't get the customers through the shop, and they have the option to go someplace else for customer pay services, they will. We lose those customers to the aftermarket; they're most likely not migrating to other dealerships for customer pay service. If you are in a situation where you're scheduling 2-4 weeks out, and there are customers who need an oil service today and we can't get them in for three or four weeks (and I'm hearing that a lot lately) they will go someplace else. Fix your capacity problem, or it will shortly fix itself.
- Make sure that every sales customer who's buying a car from the dealership is introduced to your service department. This is critical. Set the next service appointment for each customer that is currently there for service, so that we're not waiting to see if or when they might call us back. This helps establish a time frame for follow-up to make sure we have a strategy to engage them before they have a chance to defect to the aftermarket. Those are just simple examples of things you can do that can affect Customer Pay RO Count and retention.
Customer Pay Labor Gross Profit
When it comes to Customer Pay Labor Gross Profit, I'm actually seeing an increase across the industry. I believe it is being driven by more repair work and less maintenance work, as well as increases in dealer labor pricing policies across the board. Today, customers tend to spend more money to take care of their purchase because of the current price to replace a vehicle. The average new vehicle price today is a little bit over $45K compared to even three years ago when it was just a little over $30K. People are starting to realize this and they're willing to spend money to fix what they have as opposed to replacing it. Maintenance comes into play there, too -- they are more willing to spend money to take care of what they have, rather than spend money on repairs or replacing the vehicles in the near future.
Customer Pay Labor Hours Billed
I’m seeing an overall increase with Customer Pay Labor Hours Billed -- technician hours attributed to customer pay. Year over year, we've seen a 17% increase -- which falls in line with gross profit, but with the RO Count being down and labor hours being up, we're probably doing more repair work in the shops today than we are maintenance. I ascertain this based on a reduction in repair order count, coupled with the increase in both customer pay gross profit and labor hours. Again, the maintenance customers are the ones that we're losing to the aftermarket, which I believe is why we're seeing the downturn in Customer Pay RO Count. It doesn't matter what you make per ticket if you don't have tickets coming in. Eventually that's going to have a negative impact on your fixed and variable operations retention.
Putting it All Together
Let me wrap up with this: If you have an increase in Customer Pay RO Count and you're seeing an increase in Customer Pay Gross Profit on both parts and labor, and you're also seeing an increase in hours billed in the shop, that typically indicates a fairly healthy and growing dealership. If you have a negative trend in either Customer Pay RO Count, tech hours billed through the shop on customer pay, or in customer pay parts and labor gross profit; generally, any one of those three in a downturn would indicate a wisp of smoke on the horizon. Any of these symptoms require your immediate attention!
It could be that we have more RO Count, but our tech hours are down, which means maybe we're too busy to sell! We're running the cars through, but not really doing inspections and maintenance menu presentations. You could have an increase in labor hours billed through the shop and have an actual downturn in RO Counts. We're seeing more large jobs coming through the shop (warranty or otherwise), which may be stopping us from getting more maintenance services in (oil changes, etc.), which again, could have a negative impact on customer retention. In today’s market, retention is the most important metric that all the dealers need to be watching. Manufacturers are in a race right now for market share.
In regards to who has been selling the most vehicles -- luxury brands, right now, are suffering. We have competition in the market today that we've never seen before. I'm talking Rivians and Teslas. Although we don't have all the sales data, we do have registration data. Tesla was the number one selling luxury brand based on sales registrations, outperforming both Mercedes-Benz and BMW in the first six months of 2022. So, for our typical Chevrolet store, Honda store, Toyota store, etc., survival is really going to depend on getting those customers back into the dealership. Customers who do business in your service department and who bought a vehicle at your store will most likely give you the opportunity to sell the next car to them first, as opposed to customers who bought at your store but don't do additional business at your store. We have an opportunity to avoid losing these customers to other brands -- even some of the new upstart companies coming into the market, which long-term could be devastating for dealership operations, especially parts and service departments.