Your market capture rate is a telling indicator of both, but measuring is crucial.
If you have a choice between customer satisfaction and profitability, what is your choice? I would take customer satisfaction – without satisfied customers the ability to make profit will be short-lived.
How to measure customer satisfaction becomes the challenge. Some people define it as repeat business; others measure the change in sales from one period to another; still others use surveys.
One of my favorite indicators of customer satisfaction is the market capture rate. How much of the available parts and service business do you in fact receive on the machines that you sell and service? What is your parts market capture rate? What is your service market capture rate? I will put parts at around 35 to 40 percent and service in the range of 15 to 25 percent, which by nearly any measure is not very good. The interesting thing about the parts and service business is that management has been held harmless because there is no precise, authoritative measurement by which this is reported. It is an opinion. That means that we don’t have a high standard of market capture rate against which we are measuring the performance of the parts and service departments.
That is about to change.
With the advent of machine telematics some years ago, we can now track the hours of each machine and start to evaluate parts and service consumption rates across machine models and applications. This will be a great advance as we will finally know on which machines we are losing the product support business and on which types of products and services. This will be a tremendous change and opportunity for everyone in the parts and service business.
Now let’s turn back to profitability. Before we start, I would ask that you consider productivity as the key element to making money. Further, I submit that any activity that takes away from making money is nonproductive. Those are very simple and intuitive thoughts, but at times we forget they are, albeit basic, but very true.
Does charging a lower price on internal activity, from a management reporting perspective, contribute to improving productivity? I submit to you that it does not. Think about internal work on a rental machine. Does that contribute to productivity? Not in any manner of thought. In fact, why do we even bother with a work order for repairs and maintenance on a rental machine? Why do we have highly skilled technicians doing the work? Why doesn’t the rental department have its own mechanics and shop space? Is it productive to use the main shop for rental work? Of course, we can ask the same questions about machine preparation for delivery, aftersale inspections and other activities. How about maintenance? Why do we use journeymen to do this work?
When a discounted rate is applied to internal rate, how effectively do we sell those assets? In my experience, we subsidize poor performance in the sales groups by charging anything less than a customer retail price on internal work. What do you think? Do you receive the usual parts margin and service margin in the sales transaction as well as the usual machine margin? You know you don’t. Why do we settle for this kind of performance? It is nonproductive and thus does not contribute to profit.
I will leave you this month with the following scenario: You take in three trade machines. They are all made in 2009 and they each have 1,200 hours on them. Cosmetically and mechanically they are identical. In effect, they are the same machine. On one of the machines you gave a trade-in value of $50,000, on another you gave $75,000 and on the last machine you gave $60,000. The questions are: Which machine will the salesman sell first? And which machine does the dealer principal want to sell first?
When I pose this question in Quest classes or in Insight group meetings I get the same answer all the time. The salesman will sell the $50,000 machine first and the principal wants the $75,000 machine sold first.
The real question is, why would any of these three machines be sold at a different price than any of the others. The answer is that we are a costdriven sales business and not a marketprice-driven business. If we provide a suggested retail price to our sales force, that is a productive activity and thus is profitable.
First, we need to have a customer focus and keep our customers happy. Second, we need to focus on productivity, not just as a means to reduce costs but also to improve profits.
by Ron Slee
About CED Magazine
Construction Equipment Distribution is published by Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada.
With CED, content is king. No fluff, no advertorials – CED just gives AED members what they want to read: business information, industry and association news, plus fresh, original and useful feature articles that they share with their management teams. Our subjects range from rental, product support, sales strategy and customer service to technology, construction markets and legislation – and much more.