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It’s a generally accepted practice in the auto retail business: the service department offers the used car department discounted rates. Doing so keeps the recon cost of the vehicle low, which makes the resulting margin and gross higher.
But does it really? I would argue that dealerships as a whole would reap more profit if the service department charges the used car department “door rate.” How so?
First of all, the used car department is a high volume customer. Think of all the additional gross that could be generated in the service department if they charged more for their services.
Plus, charging a higher rate should eliminate the all-too-common side effect of used vehicles being stuck in service because service management perceives they don’t make as much gross on used vehicles as they do on customer vehicles.
Let’s look at an example. Two cars come into the service department at the same time: one internal car at a rate of $65/hr and a customer’s car at a rate of $100/hr. Which car will be serviced first? If the service department is busy, the used car may sit there for days.
As any GM or sales manager knows, the majority of gross is made on a car the first five days the dealership has the car. Therefore it’s critical that every car gets out on the front line within a day or two. Every day that a used car sits in the service department is a day the potential gross to be made on that car drops.
Now, I know what the used car managers are thinking. If they were charged full rates by the service department, they would not be able to charge a competitive price and their gross will drop. But again, that reasoning is flawed.
In my experience—and there have been studies published on this—it is a proven fact that “the gross you get is the gross you get”. If you average $1,800 front gross per used vehicle this number will not change just because the recon cost has gone up. Most used car departments work from cost up. So the cost of the car plus the cost of repairs becomes the base cost, and the desired gross is added to that along with any market conditions. Sales Managers know the bottom line gross they need. The salespeople may have to negotiate a little harder but they will still make the desired gross.
So if you follow my theory, every department makes more gross: the service department because of the increased rate, the parts department since parts are not discounted, and finally, the used car department since the vehicles are coming to the line and being turned faster.
For the intrepid souls who want to test this theory, results can be tracked via reporting tools available in a DMS with integrated fixed ops and sales modules. I am confident that not only will the reports show the RO dollars on used cars going up, but the average age (when sold) will decrease and the gross in the used car department will be unchanged, if not higher. Overall, this combination results in higher gross for the dealership.
Do you know any dealerships that have tested this theory? What were the results?