How to Determine Your Dealership's Service Labor Sales Potential

The labor sales potential for any franchised dealer’s service department is first dependent on the units in operation (UIOs) for that franchise in the dealer’s market. Unfortunately, very few of the manufacturers provide this UIO information to their dealers. For a fee, vehicles in operation (VIOs) are available by zip code from R.L. Polk, Inc.

Since there are other estimates used in the calculation of labor sales potential, some dealers have decided that UIO accuracy isn’t all that important. Therefore, they estimate their UIOs and calculate their labor sales potential in the following manner:

1. Establish an average buying cycle for the customer demographic that favors the dealer’s franchised products. For simplicity of the math, in this example we’ll use 48 months.
2. Calculate how many new vehicles the dealership sold over the last 48 months. Again for simplicity, in this example we’ll use 4,000 new units.
3. Calculate how many used vehicles (of the dealer’s franchise) were sold over the last 48 months. We’ll use 3,000 used units.
4. Add the new and used units together to estimate the dealership’s UIOs (4,000 new units + 3,000 used units = 7,000 estimated UIOs.)
5. Estimate the number of annual visits by the vehicle owner to any service facility. This number, usually averaging between 2.0 and 3.0 visits per year, will vary both by franchise and geographic region. In this example, we’ll use 2.5 visits per year. (7,000 UIOs x 2.5 visits per year per UIO = 7,500 annual customer service visits.)
6. Determine the average number of flat rate hours billed (combined for customer-paid and warranty) at each service visit. Again for simplicity, we’ll use 2.0 flat rate hours per service visit. (17,500 annual customer service visits x 2.0 flat rate hours per visit = 35,000 annual flat rate hours.)
7. Finally, apply the blended effective labor rate (BELR) for all customer-paid and warranty labor categories, and calculate the annual service sales potential for the combined customer-paid and warranty labor categories. In this example we’ll use a BELR of $70.00 per flat rate hour. (35,000 annual flat rate hours x $70.00 BELR = $2,450,000 combined customer-paid and warranty labor sales potential.)

Note: Remember that this calculation does not include internal labor or new vehicle inspection labor.

Should you base your annual business plan on, and apply your resources to, this market potential? Not necessarily; it depends on how your current level of labor sales compares to this calculation. In nearly 25 years of training and consulting, I have had only one client-dealer whose combined customer-paid and warranty labor sales even approached 100% of his market potential. Most of my client-dealers have initially been in the 50% - 75% range. What you need to recognize is that 100% of this market potential should be yours! For a number of reasons, most dealers have allowed a large portion of these potential sales dollars to flee to the competition (and I don’t mean to other dealers of like-franchise).

The professionals of NCM have helped a large number of dealers do a much better job of regaining a significant portion of this lost market potential. It’s really not that difficult—set realistic improvement targets, plan your work, and work your plan.

To learn more about the professionals of NCM Associates, visit our Team page.