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Jared Hamilton
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Michael Esposito

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Good Profit vs. Bad Profit and Why Dealers Should Stay Away From the Latter

 

Most dealers I speak with typically think that ALL profit is good profit. How can any profit be bad? But I believe there is such a thing as bad profit, and if a company continues to focus on growing its business generated on bad profit, ultimately it will hurt that company more than help.

So what is good profit? Any profit generated from selling a product or service, with a reasonable profit margin built into the pricing. Good profits do not cause distrust on the part of the customer.

As to bad profits, you cannot spot them by reading a financial statement. Bad profits are a lot like the Netflix debacle. The results produced look great in the short term from a financial perspective. Revenue increases, dollars drop to the bottom line. However the long term detrimental affects far out weigh the short term gains. Customers leave to find a better less costly supplier.

So how do you identify a bad profit? Typically, bad profits are generated by taking advantage of the customer or his/her situation.

Let me give an example: airlines that charge baggage fees and now carry-on fees. Yes, this generates a lot of profit for these airlines. But I argue that it’s bad profit, because it drives consumers to choose another airline first, if at all possible. For instance, Southwest Airlines does not charge any baggage or carry-on fees. If a consumer has a choice between flying Southwest and an airline that charges $25 for each bag (each way), and the cost of the flights are approximately the same, and the schedule for both flights is acceptable, which airline do you think they’ll choose? Southwest, of course. And because of this, Southwest gets more customers and generates more good profit. So in the short term the airlines that charge for baggage do make profit off the customer but what does it do to that customer relationship over the long term. Customers hate it and in the future will fly someone else if they can.

In a dealership, an example of “good profit” would be the profit generated from a car sale or a typical service job such as replacing brake pads. As customers arrive at your dealership, you may be offering items such as free high-speed Internet access in your service waiting area or even free car washes. When I managed a large dealership, we had an automated car wash and every service customer received a free car wash for their vehicle.  While it’s true that providing Internet access and car washes have a cost associated with them, and it would be easy to justify to yourself why you should charge for them (“we have costs so we need to pass them on to the customers”) chances are you would never think of passing those costs to your customers. Imagine if you charged your service customers $4.95 for Internet access, or added $3 to every RO for a car wash. This would be bad profit, because it would be highly likely that those customers would soon be looking for a dealership that was more customer friendly.

The concept of good profit and bad profit should apply to your vendors, too. Do you have a vendor that “nickels and dimes” your dealership for every added service? Do you have contracts with vendors that you find allows the vendor to take advantage of you? Some dealership management system vendors will charge for things that the dealer believes should be free. That is exactly what I am talking about….an example of a bad profit.

When it’s time to choose any type of vendor, consider the company’s business practices to get a feel for how much good profit vs. bad profit they generate. And as you consider any new sources of profit for your own dealership, steer clear of “bad profit” revenue streams. Long term, bad profit has a detrimental impact on your brand.

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