Profit is NOT a dirty word!
I was on the phone with my father in law yesterday talking about the importance of a Product Pricing Matrix (PPM) and accelerated profit margin % on low cost items (I digress…more on this topic in a later post 😉).
We are so on the same page when it comes to the importance of the psychology of a shops business culture because it determines whether service writers have the confidence and support to follow the PPM and quote appropriately on jobs.
In management we refer to “the tone at the top” of the organization, this is the leadership (owner/GM) in an organization that literally leads by example and ends up defining the “culture” of the company.
Owners and leaders who are serial discounters are creating a culture of discounting.
There are 2 major fall outs that come from this behavior
- You’ve just trained your employees and service writers to use discounting to win customers over, rather than stick to the PPM
- You’ve just trained a new customer to expect your shop to give them a “special discount”
Why do owners do this?
They’re eroding profits from their own business, this impacts the owner’s ability to give pay increases, buy new equipment and in their personal lives impacts their ability to draw more income personally out of the business.
Coming from working with companies that hired me as a Financial Controller / CFO, these entities were already growth focused and monitoring profits and margins was the focus of executive discussions in the meetings I was involved in; so why am I repeatedly faced with shop owners who literally discount their own bottom line?!?
My father in law told me that on his first job on the parts desk at the GM dealership in Kamloops BC, the owner had a talk with him and explained to him that “profit isn’t a dirty word”, it is their duty to earn profit so that the service department can operate.
He was fortunate to learn early on in his career the importance of managing the bottom line with the careful monitoring and planning of the parts purchased and the product price matrix.
45 years later and semi-retired (he continues to operate his side business “hard to find parts”) he has worked in various dealerships managing the numbers, but more importantly the people.
Kevin (that’s my father in law) understood that regardless of what PPM was in place, he had to earn the respect of the people under his charge and guide them to respect and value the importance of the margins that were set-up.
And of course, he had to lead by example.
I writing an article on leadership right now. It is foundational in the success of change management in organizations and so for my shop clients to achieve their goals, they must be able to lead their team to execute the plan.
On average, tire dealers are earning around 4% net profit and many times they don’t realize their true net profit until many months after the close of their year-end.
I used to be dismayed, but not surprised, when a client would ask me in the meeting to present their year-end financial statements with “how did I do?”.
As an entrepreneur myself I can appreciate how overwhelming it is to run a business and “wear so many hats”, but one area that all entrepreneurs must understand and work on is their bottom line.
As the owner, you are the only one in the entire business (unless you have a controller or CFO) who will ever look at the big picture and ensure the business remains profitable.
By the time you’re sitting across from your accountant it’s too late for you to do anything to improve your shops performance for that year; which is why we shifted to a model of working more closely with clients to evaluate their business’ performance regularly.
Learning to pull meaningful reports from your shop management software and point of sale (POS) system is crucial, knowing monthly/weekly or even daily what your net profit for that period is allows you to immediately investigate the root issue and fix it!
There’s no secret to how you improve profit; You either increase sales, decrease expenses or both.
However, it is a calculated skill to make the appropriate changes based on industry standards and careful analysis of your current position.
Which brings me back to my point of value pricing.
When shop owners tell me they are priced to the average in their market, what I hear is they are “stuck” competing with other shops by keeping their labour rates down, but if you are the type of business owner who:
- invests in your technicians skills with training and certification
- buys quality diagnostic equipment
- maintains excellent quality on the service you provide
Then you deserve to charge more for the value you are providing. It costs money to invest in all of these things and you must pass on these costs through to your customers who also value all that you do for them.
You’re in the business of providing a professional service and most of your customers (I know I’m certainly one of them) appreciate this superior service and reliability; it is the reason we keep coming back.
I have so much faith in my repair shop because I know they are honest, hard working people who take pride in what they do.
I never have to question the details of a quote because the service writer explains to me in detail what my vehicle requires and the nature of why additional labour time or expensive parts are required to do the job.
Now, I know what you’re thinking, I am not everybody! Well you’re right, but the majority of your customers probably are.
Don’t let the minority of people who complain and price shop be the driver for your pricing decisions.
Focus on the customers who value you and your superior service, they’re the ones who keep coming back and who will refer friends and family to you.
The people who always complain about pricing, guess what, they’re never happy and they will always complain; be courteous, but be firm with your pricing.
With a potential recession on the horizon it is important to take the time to understand the financial position you’re operating at, where you need to be to “break-even” and then set targets to earn a net profit that can sustainably maintain your business and your personal lifestyle; not to mention position the value of your shop for an eventual sale when you are ready to retire.
Some attainable metrics that my clients whom I work closely with to create future forecasts, benchmarks and measure performance are attaining net profit of 20%.
I tend to work backwards in this respect that I calculate the current net profit first and reverse engineer everything else around it to determine the ideal plan moving forward.
If you are ready to take your shop to the next level; To achieve the earnings you deserve for all the hard work you and your team put in, then email us to schedule a free 10-point financial inspection.