by Nathan Cooper
What do we mean by absorption rates?
An absorption rate is a metric that’s often used within the automotive industry. It’s used to track dealership performance in either aftersales or sales against the overheads (or fixed expenses) the business has to manage from expenses such as salaries, rent or commodities – like gas and electricity.
What’s the calculation?
The classic calculation for the absorption rate metric is:
- Aftersales (parts & labour) Gross Profit/Dealership Fixed Expenses = Aftersales Absorption %
- Sales (New & Used Car) Gross Profit/Dealership Fixed Expenses = Sales Absorption %
Why is it a vital metric?
The metric, when looked at from either a car sales or aftersales perspective, can give an automotive dealership a view of the performance of each business area and its ability to cover the fixed expenses (overheads) of that business.
Typically, the higher the percentage figure, the better.
If aftersales is tracking at 100% absorption rate, they are covering all the business’ fixed costs without the need to sell a single car. Where appropriate, it means car pricing can be more competitive.
If sales track at 100% absorption, all fixed costs are covered, and service/repair work can be more keenly priced.
But what’s the reality in the dealership?
The reality is that every automotive dealership has the blend of work, from sales and aftersales teams.
What tracking your absorption rate allows is understanding where your business can pivot and adapt to changes or, from a defensive standpoint, act before a problem occurs.
For example, if a dealership’s Aftersales team is tracking close to or over 100% absorption, Sales teams can be more flexible in pricing terms when selling new or used cars.
Tracking new and used car sales as a metric against absorption has, at least to an extent, fallen out of fashion and become a forgotten metric. We want to get it back on the radar because it can be especially helpful when market conditions get tougher.
We believe absorption for sales and aftersales can add real value to businesses. In both cases, knowledge of absorption in real time enables dealer principals to take a holistic view of their business. In turn, they can see how they can start to make their Aftersales teams more competitive – especially in key areas like tyre sales, for example.
Being competitive can help to gain conquest work that can drive retention and lifetime value. The additional contact points can help build relationships; it’s an investment to deliver long-term customer loyalty and the chance to sell again to that customer in the future.
How can absorption rate tracking influence business strategy?
Tracking absorption rates allows dealerships to understand what needs to be achieved across the business to cover the fixed costs and, ultimately, stay in business.
It also gives a great indication of customer retention, the ability of your Sales teams to convert sales and the success of your Aftersales teams when upselling additional services.
For example, suppose a dealership’s absorption rate falls from 80% to 50% over time, with no other external changes (price increases, salary increases etc.). In that case, revenue is slowly being eroded from the department, and they have an issue with retention, upselling or winning new aftersales business.
What happens when external prices increase?
As of today (August 2022), we see some of the most significant increases ever in energy costs; this cost-of-living crisis is hurting consumers and businesses.
Nor are price increases limited to utilities; inflation on a broad basis means that overheads/fixed costs are rising, which will hurt absorption rates if income levels stay the same.
Through tracking absorption rates, dealers can easily see this downward trend, and with a team that may have considered themselves as performing well – when compared against the increase in overheads – it will show that more needs to be done. That’s why dealerships need to ensure that they retain and win as many aftersales customers as possible, and sell new and used cars.
How can dealerships start to track this metric?
Dealerships’ Accounts teams will have access to the overhead costs and gross profit margin by function so that data can be gathered from here as a starting point.
Alternately, Business Intelligence Solutions – like REALinsights – have access to this data in real time and can provide your absorption rate as live 24/7 for simple, easy reporting and tracking.
Please speak to us today at info@rtcauto.co.uk, or visit www.rtcauto.co.uk to discover more.
