Discounting Internal Labor and Parts
Discounting Internal labor and parts is a common practice in dealerships, and is a regular discussion point in 20-Group meetings even among those that have decided not to discount. Many sales-minded dealers point out that the Used Vehicle department is the best single customer the Service Department has and should receive incentives to keep bringing their business. Let’s ignore the fact that the UV department should not have the option to bring their business elsewhere (though it happens….), making the best kind of customer – the captive customer. Let’s further ignore the fact that the “best customer” is also under the same roof and its revenue appears on the same financial statement as the sales departments. Here are a couple more basic reasons why one should not discount Internal labor and parts:
1. Discounting Internal labor and parts does not really save the Used Vehicle department much money. To see just how much your efforts are saving you, do the following calculations using data from over a given period of time (last month works nicely…):
a. Retail Labor Gross Margins – Internal Labor Gross Margins (recon only) = Difference
b. Difference from (a) × Total Internal Labor Sales = Saved Recon Labor
c. Retail Parts Gross Margins – Internal Parts Gross Margins (recon only) = Difference
d. Difference from (c) × Total Internal Parts Sales = Saved Recon Parts
e. Saved Recon Labor from (b) + Saved Recon Parts from (d) = Total Saved Recon
f. Total Saved Recon from (e) ÷ Total Internal Units = $$ Difference per UV Unit
Whenever we do this calculation, we usually find that a Used Vehicle Department is saving around $25-50 per UV unit. If $50 is the difference between making money and not making money on a Used Vehicle, you have other issues to address.
2. The Service Department is a profit-generating department as well; by discounting their labor, you are simply handicapping them to cover up the UV department’s shortcomings. Your focus when bringing in a UV unit should be on the gross generated by the front and back-end gross, as well as the gross generated in the Service and Parts departments. Otherwise, you are missing a big piece of the puzzle!
3. By discounting Internal Labor and Parts, you are sending a message to your entire dealership that could have catastrophic results. We constantly have to remind Dealers, GMs and Service Managers that their Service offering is extremely valuable. On top of the decades of experience that are required to work on increasingly complex machinery, there is a huge investment in dealership equipment and technician tools at every dealership. Why door rates are as low as they are is baffling, especially when you compare to other service industries. By discounting the rate for your own operations, you show your technicians, service advisors, parts counterpeople, and everyone else in the dealership exactly how much you think their parts and labor are worth. How do you expect them to not to discount on retail labor and parts when you have made it clear that you don’t agree with the pricing?
4. Follow the money and you will find that the biggest benefactor when you discount Internal labor and parts is the salesperson. Their commission is artificially higher because the cost of the unit was lower than it should have been. Sure, you could add a lot pack to fix that or maybe your salespeople don’t make enough on Used Vehicles so they need a carrot to motivate them. But you are simply covering up a bad practice by moving the numbers around!
The truth is most stores discount because the boss came from a sales background and is focused on sales gross and little else. But in doing so, the entire dealership loses, including the sales departments whose true potential is never reached since their inefficiencies are hidden behind bad practices.