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There is a clear misalignment between the service department’s contribution to store profits and the investment in service marketing. According to NADA, service is responsible for 47.3% of dealership gross profits. However, working with dealers we estimate service marketing is <10% of the average dealership’s marketing budget. Why aren’t dealerships investing in marketing to support fixed operations?
Look at these charts for a minute:
Many of my dealer friends argue the chart is misleading because vehicle marketing indirectly drives service profits by setting up future warranty and customer pay opportunities. They feel that the alignment is not as bad as it seems.
Well, I contend that the indirect relationship flows at least equally the other direction. First, only half the service customers were sales customers. So, the indirect impact from sales is at best half. More importantly, servicing owners are 1.5x more likely to remain loyal than non-servicing owners. In addition, loyal owners pay higher margins, providing the loyal sales base needed to sustain a store through challenging economic and product cycles.
We can differ on which way the net arrow points. But in my opinion, the indirect benefit from sales to service justifies a fresh look at this huge misalignment. It rather represents a traditional mindset that service naturally flows from sales, and therefore requires only limited marketing encouragement.
Given dealers only capture 25% of the service spend, the flow is not very natural. In addition, by most estimations, it is getting less certain as increased leasing places more vehicles in the hands of second owners that much earlier. And let’s not forget how independent service centers are increasingly competitive.
So, what is the right number?
Actually, I don’t know. Because we are so far from alignment, it is difficult to estimate the most economical place to stop. However, I can suggest a way to determine the right level over time. I once had dinner with a former Expedia CMO and I asked, “How do online businesses determine their marketing budgets?” He stated Expedia didn’t have an ad budget. In astonishment, I stammered “What do you mean?” My friend explained, he kept spending, so long as each dollar of additional marketing spend yielded three dollars of revenue. Pretty logical!
So, what would this look like in our industry?
Many dealers are perfectly fine spending $300 on a TrueCar lead which yields at best $1,800 front and back gross. Marketing spending across the industry per new vehicle sold was $630 in 2016; or 33% of variable ops gross margin. By this formula, you should be satisfied with an incremental service marketing spend that yields 10x in gross, up to $17k per month in service marketing. (The average dealer Service & Parts CP GP per month is $177k.)
As a dealer, do you find it hard to image spending that much? Well, isn’t that better than facing the harsh reality that stores continue to afford 75% service leakage as new and used vehicle margins continue to decline?