The equation looks like this:
For instance, a dealership with $200,000 profit from parts and service and $300,000 in fixed expenses has a 67% absorption rate. ($200,000 ÷ $300,000 = .67). The income from parts and service would cover 67% of the dealership’s fixed expenses.
Why Is Service Absorption Important?
Service absorption is an important metric for boat dealerships. A high absorption rate can lead to more sales because representatives have room to offer more competitive prices. A high absorption rate also results in higher gross F&I (finance and insurance) profits and a higher operating profit.
Boost Service Margins
One important way to increase service absorption is to increase your margins on the services you provide. This can be done by establishing effective workflows and automating key tasks that are complex and time-intensive. Employees can focus on getting more work done in a shorter amount of time, thus increasing the profit margins of their work.
A DMS platform, such as the software Dealership Advantage offers, is a powerful tool that provides advanced, real-time reporting. With access to efficiency reports and other key data, you can monitor the output of your service technicians and identify areas for improvement.
Increase Cash Flow Through Your Service Department
The more money your service department collects from settled invoices, the higher your income as well as your absorption rate.
Of course, increasing your prices for parts and labor could also increase revenue for your service department, though you’d want to be careful not to lose business with prices that are too high.
Other strategies to increase cash flow for services include:
- Send invoices immediately once the service is complete.
- Send invoice reminders or incentives.
- Incentivize on-time, full payments with small price reductions.
- Penalize late payments with additional fees, either as a one-time penalty or a fee that accrues over time until the invoice is paid.
A DMS platform can help increase cash flow by simplifying the billing process of your service department. For instance, the Dealership Advantage DMS makes it easy to provide quotes, automate payment requests and invoice reminders, and keep track of missed payments.
By selling parts and services that maximize your profits and removing items that aren’t profitable, you can set yourself up for higher profit margins.
Using Dealership Advantage, you can monitor technicians’ output through efficiency reports or see cost discrepancies through price variance reports. With quick, accurate information, you can pinpoint strengths and weaknesses—and resolve problems that might otherwise have damaged your bottom line.
You can also enhance profitability with parts that are more powerful and, therefore, more lucrative. Our DMS Platform allows you to access suppliers’ purchase price variance, which gives you an advantage when negotiating pricing so that you buy low and sell high.
In essence, a DMS platform offers advanced reporting capabilities, which allows dealerships to identify the parts and services that are (or could be) most profitable.
Another way to increase your service absorption rate is by simplifying your payment process, which leads to prompt payments and a higher level of customer satisfaction.
Don’t wait to initiate the payment process. Once the deal is signed, that’s the moment to begin the first billing cycle.
Don’t use paper. Use an electronic signature for payment agreements and work orders. It’s much easier for you and your customer to access them, and it’s more secure than paper files.
Don’t store credit card information on your website. It might be convenient for customers to quickly make payments with stored financial information, but this practice puts them (and you) in jeopardy of theft and identity fraud.
Instead, use a modern payment partner like Stripe that encrypts all sensitive information. So you can provide the same convenience of stored credit card information without the risk.
Many DMS systems, including the platform offered through Dealership Advantage, allow you to simplify your payment process, leading to higher levels of efficiency, customer satisfaction, and paid invoices.
Request a Live Demo
The Dealership Advantage DMS offers everything you need to monitor your business and maximize your service absorption rate. Schedule a live demo to learn more.