With the current supply-and-demand dynamics in the automotive retail sector, sales margins can be razor-thin. Maximizing profitability increasingly hinges on optimizing the less conspicuous yet crucial aspects of a dealership’s operations. 

One such cornerstone is the parts and service department, a vital revenue stream that is sometimes overlooked in favor of the primary focus on sales of new and preowned cars. However, enlightened general managers and dealer principals understand that fine-tuning that department can increase absorption, significantly bolstering the bottom line and overall profitability of any dealership operation.

Discounting Service Hours, Parts Sales

While discounting service hours and parts sales can serve as a short-term tactic to drive service work volume and customer satisfaction, it is quite common that there is no policy in place that governs when, why and how a discount should be offered. Exacerbating the issue is the generally use of discounting as a customer pacifier when it isn’t necessary. 

The question every general manager and service director should ask themselves and know the answer to is whether they know the true cost to the department and the dealership of giving away one hour of free labor? 

General managers and service directors should assess the true cost when offering discounts or free labor. Few understand the full implications. For instance, if the effective labor rate is $200 per hour, giving away one hour of labor generally requires selling an additional five hours at that rate to recover the lost profit. That directly impacts the net profit, potentially eroding margins.

While discounting can indeed boost short-term service volumes and customer satisfaction, its indiscriminate use requires careful consideration, as it otherwise has both short- and long-term implications on profitability and the associated value of the work performed:

Margin Erosion 

As explained, discounting service hours and parts sales erodes profit margins, especially when not balanced against cost efficiencies and productivity gains. While attracting and retaining customers is essential, it should not come at the cost of profitability.

Perceived Value

Constant discounting can inadvertently lower the perceived value of the dealership’s service offerings. Customers might come to expect discounts as the norm, making it challenging to maintain profitability without discounts.

Staff Morale and Productivity

Incentivizing discount-heavy sales strategies can negatively impact staff morale and productivity. Service technicians may feel pressured to rush jobs or compromise on quality to meet service discount targets, ultimately affecting customer satisfaction and retention.

Understanding the Bottom Line

General managers and dealer principals should adopt a strategic approach that balances customer retention, profitability and operational efficiency in the parts and service departments. 

Here are some actions that can support that:

1. Pricing Strategy – Implement a strategy that reflects the value of the dealership’s service and parts offerings. That may involve tiered pricing models based on service complexity, vehicle type or customer loyalty programs rather than blanket discounts. Shop your competitors in the market to assess how competitive your dealership’s service and parts pricing is compared to other franchised dealers, as well as specialty service providers, such as Jiffy Lube.

2. Cost Management – Focus on optimizing operational costs without compromising service quality. That could include negotiating better supplier terms, improving inventory management to reduce carrying costs, and enhancing service bay utilization to maximize technician efficiency. Consideration should be given to using parts runners, eliminating the need for technicians to waste time at the parts counter. If your technicians don’t use 100%-plus of their available time to “turn wrenches,” you’re underperforming. 

3. Customer Retention – Invest in building strong customer relationships through exceptional service experiences rather than relying solely on discounts. Engage customers through proactive service reminders and value-added services that differentiate the dealership from competitors. In an era when consumers are very comfortable texting, communications tools such as myKaarma enable technicians to provide customers with convenient updates on service work in progress; using video, the technician can suggest additional, recommended work. Customers generally accept such suggestions, which increases the work performed and the gross margin on each repair order. 

4. Training and Development – Prioritize staff training. Every team member interacting with customers should adeptly represent your dealership and uphold brand standards—they are ambassadors. Consistently train and develop service staff to enhance technical skills, customer service and efficiency. Well-trained technicians complete jobs faster and more accurately, boosting service bay turnover and customer satisfaction.

Set high standards. Train your staff to embody excellence, which improves overall performance in the service and parts departments. With new-car sales challenges and rising inventory levels, it's crucial to strategize and operate at a top-tier level dealership-wide. Educate customer-facing staff on consistently delivering excellence.

Clients trust you with their vehicle needs, so staff must have knowledge, skills and confidence to explain why clients should choose your dealership. That includes highlighting benefits like factory-trained technicians, genuine parts, and clear explanation of automotive systems.

While price matters, clients often choose their servicers based on trust and perceived value. If they don't see a compelling reason to choose your dealership for service, they may seek other options. Independent shops can easily attract clients, and once your clients leave you for an independent, you will struggle to win them back. Training your staff to effectively communicate the value associated with your services is crucial.

Your team's confidence and integrity foster trust and loyalty. Ensure they recommend necessary services and explain their importance.

Customers trust their service advisers; they should be your strongest sales team. Equip them to communicate effectively and ensure they commit to continually recommend additional services, maximizing transactions and profits.

5. Compensation plans – It is my experience that when the pay plans of service advisers, parts managers and service managers/directors are directly tied to the gross, or even net, margin of their sale of service work and parts sales, or that of the department, as if by magic, discounting is much less prevalent!

If your parts and service departments continually under-deliver from a margin contribution perspective, you must ask yourself if you have the right compensation plan in place. It is amazing to observe how quickly discounting will be limited if the discounting directly affects the paychecks of those who extend the discounts.

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About the Author

Sam Abergel is director of fixed operations at Mach10 Automotive. He has more than four decades of automotive industry experience, including as president of the Parts and Service Managers Guild and representation on the Porsche North America Round Table. He’s helped steer dealership transitions and held leadership positions with Chrysler-Dodge, Audi, Lexus and Porsche dealers. 

EDITOR’S NOTE: This article was authored and edited according to Auto Dealer Today editorial standards and style. Opinions expressed may not reflect that of the publication.