Absorption Rate Formula Is Very Simple
But Very Important
What does the absorption rate formula look like?
Dealer Expenses ($) + Interest Expense ($)
(Divided By)
Parts Gross Profit ($) + Service Gross Profit
= ABSORPTION RATE %
The dealers who are able to maintain an Absorption Rate of 100% or greater put themselves in a position that will be:
- Independent of machine sales gross profit
- Resilient to machine sales downturns
- Resilient to machine pricing pressures
- Better "risk-managers"
- Creative "deal' makers
You might be asking what absorption rate means to an equipment dealership?
The Absorption Rate formula is a measurement for the dealer to determine if the gross profits produced by the Parts and Service departments can “absorb” the entire dealer’s overhead expenses.
Here are a few ways to improve Absorption Rates while also improving customers loyalty.
I have had many customers tell me that the reason they chose my dealership to do business with was that our Parts and Service departments always looked for ways to help them control the owning and operating cost of their equipment.
Helping customers to control their "owning and operating costs" was the key to our dealership's success
We acted as our customer's partner in their business not just another supplier.
In other words we found ways to build TRUST.
How does the Absorption Rate Formula build trust?
First, we constantly improved Parts Availability. We made certain we had the Parts on hand where and when the customer needed them.
This allowed the customer to get the equipment that they owned back to work sooner.
Second, we performed over 70% of the repairs on a "Flat Rate" basis.
Our customers knew exactly what the cost of repair was going to be before the repair was performed.
Third, we understood the skill levels of our technicians.
We choose the right the technician to perform the repair correctly the first time, every time.
We had an evaluation process that we used following every repair.
The technician and the supervisor would meet for 15 minutes following the repair to determine if the repair was done correctly. This step saved the customer and our dealership time, money and effort.
Fourth, we performed inspections of every machine that came into our Service shops.
The machine would be fully inspected before we performed the repair (this was done at no-charge to the customer).
In approximately 30% of the machines going through the inspection process we discovered additional repairs were needed.
We reviewed these findings with our customer and offered to perform the repairs at their option.
The machine was also inspected following the repairs to make certain the equipment was operating properly. This effort reduced our "re-work" expense by 60% and improved customer satisfaction significantly.
I hope you now can see the impact of using the Absorption Rate formula can have on your dealership.
The image below will help you understand where we are headed in terms of building the strongest relationships between us the dealers, and our customers.
Finally, there are several additional steps you can take to improve Absorption Rates. I suggest you take advantage of a Free eBook I have created so you can learn more.
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