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Dealership absorption rate and 2021 Repair Order Goals

Dealerships established 2021 goals hoping every car sold goes straight to the bottom line.  As you likely already know, vehicle sales alone are not enough to achieve such a dealer’s delight.  This 100% dealership absorption rate goal is achievable, but it can only happen with a robust parts and service department.

dealership-absorption-rate

What’s your dealership absorption rate number?

First you need to determine your goal rate. You’ll use this rate to set a magic number that paints a picture for your team. Follow this by creating corresponding goals for each team member.

Here’s the National Automobile Dealers Association calculation for absorption rate. Time to break out your financial statements and a calculator.

Determine your total fixed operations gross profit (parts + Service + Body Shop). Figure out your total overhead expense (dealership expenses – new and used variable selling expenses).  To calculate your rate, simply divide gross profits by the overhead expenses.

You have your rate, but now what?  The rate is similar to a mythical unicorn floating in the sky that no one knows what to do with.  The absorption rate is important, but it can be difficult to set specific goals from a percentage rate.

CEO of DealerPro, Don Reed, presented at the 2017 Massachusetts Automobile Dealers Association Profit Builders Workshop. He points out that you should look at the dollar amount. When you have less than a 100% absorption rate, you’ll subtract gross profit from expenses. This shows how many dollars short you are from achieving this goal.  Divide this number by the number of months in your financial statement to determine your monthly shortage.

This is your number!  This is the dollar amount you need each month in your service department to achieve that big, beautiful 100% absorption rate.

Be a number enthusiast

What do you do with this magic number?  Send it out in smoke signals. Have an airplane fly it on a banner over the dealership. Serve donuts to your team in the shape of the number.  Do whatever it takes to help your team keep this number in mind throughout their daily activities.

Plan for success

How different would each day in your service department look if you broke this number down for your team? Where would you be in 2022 if each member knew what their individual goals were in order to hit this monthly number?  Even better, what if they knew what tasks (big or small) they could do to reach their individual goals?

The annual dollar amount needed and even the monthly number can often be too big a bite to digest.  Lay out a detailed plan for the service department’s customer care, customer retention, and customer acquisition. You will see a steady growth in your absorption rate as the year progresses.

Don’t forget to celebrate the small wins

Your team now knows their number, and each team member now knows his or her personal goals that will help the team achieve this number. Service department leaders must continuously review these goals.

Dish out high fives and congratulations upon meeting goals. Or better yet, offer your team true incentives for meeting these smaller goals.  Keep everyone motivated by rewarding the smaller achievements.

NADA Formula for calculating Service Absorption Rate:

Gross Profit (Parts Department + Service Department + Body Shop) ÷ Adjusted Dealership Overhead Expense = Absorption Percentage

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