Which Came First: Great Customers or Money to Advertise to Them?
The secret to growing your shop is attracting customers.
But that leads to the old chicken-egg scenario.
Editor’s Note: This article contains an example of fictitious gross profit rates and is only used to illustrate mathematical formulas within the story. These hypothetical totals are not intended to be used as guides for your business.
According to Sageworks, a financial information company, automotive repair shops experienced an average sales growth of 1.7 percent in 2013. If that number isn’t ugly enough, consider that the inflation rate in 2013 was 1.5 percent! Shops barely grew at all – at a time when Sageworks also said dealerships grew their sales by 11.9 percent.
It’s no secret what’s happening: As the economy continues to stutter, low-end customers have less extra money for auto repair, and they flock more and more to whoever has the biggest coupons and lowest prices that month.
Which means the secret to growing your shop is attracting higher quality customers. But that leads to a chicken-egg scenario.
If your shop already attracts great customers – the kind who want a trusting relationship, that listen to your recommendations and buy, that refer friends and family – then your shop already has the money to do the kind of high-quality advertising that attracts great customers.
But if your shop has a client base that currently focuses on discounts and low prices, is it even possible to get the money needed for quality advertising? In other words, which came first, great customers or money to advertise to them? Thankfully, this isn’t as complicated as asking whether the chicken or the egg came first. The answer? Finding the money already in your shop.
Where to begin?
There are dozens of places that a shop’s production pipeline can develop leaks and bottlenecks, each subtracting from or slowing down the sales and profits in a shop. But the place to start is always the same: No number is easier to fix or has as much of an immediate impact on profits in a shop than parts gross profit. If we want to find the money to do quality advertising, it’s the first place to look.
For example, let’s look at how a small improvement to parts gross profit could help an imaginary $500,000 shop.
In this example, the shop is paying its parts vendors $15,000 each month for parts. After markup, the shop is then selling those parts for $25,000. Pretty standard, right? Parts gross profit percentage is (sales-cost)/sales, so this shop has a parts gross profit percentage of 40 percent.
Here’s the incredible thing: this hypothetical shop could start fixing parts gross profit today and have the cash to do better marketing this month.
Parts gross profit has the distinction of being exactly like every other number in the shop, and at the same time, easier than every other number in the shop to fix.
It’s dead simple to fix because the only thing a shop has to do is use the parts markup matrix that is already in their shop point-of-sale system. Whether it uses percentages or multipliers, it’s the same concept: for each range of parts prices, set a markup amount, then monitor it each day and make small adjustments.
In this shop, what would a small improvement do?
Just a few adjustments to that markup matrix could lead to a parts gross profit of 45 percent, and believe it or not, that tiny change would mean that they sell those same parts for a little more than $27,000. That’s an increase in profit of $2,000 each month. Without adding a single car. Without changing staff. The only secret is that you have to use quality parts and make sure your customers feel the value through your customer service. (Before I move on, and for those who want to know how I arrived at $27,000, it’s: $15,000/(1-.45).)
But for as easy as parts gross profit is to fix and manage, I meant what I wrote earlier: it’s no different than every other number in your shop. Because after you’ve tackled your gross profit on parts, it’s easy to take those lessons and apply them to your inspections, to the way your team advises at the front counter, to the way you track your technicians’ efficiency. But they all break down in the same way: if you don’t measure, don’t track, don’t train and don’t hold them accountable, the moment you look away, every single one will begin to slide.
There’s a bigger point here, though. By which I mean, I could write all day long about how various improvements can lead to huge improvements to the bottom line (in fact, the improvement to the bottom line that comes from fixing your inspection process absolutely dwarfs the increased profits from fixing parts gross profit) … but to swing back to the first point in this article, whether we’re talking about fixing internals and finding money to advertise, or actually doing the marketing that attracts high-quality customers, there’s no such thing as an “easy button.”
Even when we’re talking about parts gross profit, which you could literally start to fix before the end of the day today, it’s not really an easy button. Without a system in place, the work you do today to fix parts gross profit will come undone even faster than the fix went into place.
Which is why I want to introduce the concept that the best marketing is a system, not a product.
If we think of marketing as a product, it allows us to just pay attention to the activity: how many cars did it bring into my shop and how much did they spend? When everything we do in a shop is treated like an easy button – use this product and your technicians are instantly better! Send this marketing piece one time and you’ll get a flood of great customers! We lose our ability to make real sustainable change.
Which is how our industry ends up completely stagnant for an entire year and the dealers leave us in the dust. Independent shops can’t play the price game; the dealers and chains will beat us every time.
So how can we treat marketing like a process instead of a product?
By focusing on results, not activity.
If we come in each morning and measure our parts gross profit percentage but never do anything about it, all of that measurement is an activity. The real result is improving it by five points and adding $2,000 in gross profit to your bank account each month.
A customer bringing in your marketing piece is an activity.
Customers who appreciate the inspection and who purchase your recommendations are the real results.
Growing your car count is an activity. Growing sustainability by attracting quality customers who spend money with you, refer their friends and come back several times a year … that’s the real result.
The process of attracting great customers is about making promises and then keeping them. It’s about building relationships and about education. It’s about sustainable results, not being frantic and busy with no-value customers.
In other words, whether we’re talking about finding the money to do quality marketing or actually doing the quality marketing, the way independent shops can win this year is by focusing on results: measure, track, train, adjust and hold the team accountable. It’s not an easy button, but it is a proven way to win.
Editor’s Note: This article is one in a series of management articles contributed to AutoInc. by Automotive Management Institute (AMI) instructors. To learn more about AMI, its courses, instructors and monthly webinars, visit www.AMIonline.org. AMI administers the distinguished Accredited Automotive Manager (AAM) program.