Dear readers!!! Aftersales service is an essential part of the automotive industry. it affects the satisfaction and loyalty of customers and represents the overall success of the business. It is support and services given after purchasing a vehicle. The menu depends on process building, including maintenance, repair, warranty services, parts replacement, customer support, and other value-added services to ensure customer satisfaction, enhance loyalty, and sustain profitability.
In a scenario of increased competition and changing customer behavior, aftersales service has become the inevitable part of an automobile business model. That is to say that Aftersales’ service has been an essential part of the whole automotive business, promoting both customer delight and profit margin. In a fast-changing environment, in which the level of technology and customer expectations are advancing; businesses emphasizing superb aftersales service will gain a competitive advantage. Innovative strategies, acquisition of skilled talent, and effective use of technology can boost aftersales services to become a potent pillar for success in the automotive industry.
In this month’s article, let’s talk about the “Aftersales absorption rate”.
This is an important indicator for determining and judging how well a dealership’s service and parts operations cover fixed operating expenses. To monitor and improve it appropriately, a dealership needs to keep an eye on a few KPIs that give a better insight into the health of aftersales operations. These KPIs would ensure alignment of business goals, identify areas for improvement, and support strategic decision-making for profitability. Aftersales absorption rate is one of the key performance measures in the automotive industry, indicating how much of the revenue paid to dealerships or independent repair shops servicing their cars covers related costs such as labor, parts, and overhead costs. Aftersales absorption is an important KPI in the automotive industry; it talks to the extent to which a dealership’s fixed operations comprised of the service, parts, and body shop cover its operational costs. Aftersales absorption defines the extent to which the aftersales business underpins the profitability of a dealership, particularly at times when vehicle sales appear to be volatile. The focus on customer retention, EV aftersales dynamics, and economic pressures have lately placed greater emphasis on this metric.
What is the Aftersales Absorption Rate?
The aftersales absorption rate is a gauging aspect from the financial perspective that accounts for the aftersales profitability of a dealership. It shows how much the revenue generated from aftersales services, such as repairs, maintenance, and parts, covers the associated costs, including labor, parts, and overhead expenses. The aftersales absorption rate is expressed in a percentage and computed using the given formula: Aftersales Absorption Rate = [Gross Profit from Service, Parts and Body Shop / Total Fixed Operating Expenses] x 100
- A 100% absorption rate indicates that the dealership’s aftersales activities completely absorb the fixed costs of the store, thus less reliance on selling vehicles for profitability. The higher absorption rate means aftersales activities are helping to absorb a significant portion of the dealership’s expenses, making less reliance on sales revenue generated from selling vehicles.Any rating below 100% means additional income from the sale of vehicles for a dealer to break even.
Let’s understand the Absorption rate by considering the following points,
Revenue Stability:
In any automotive industry, after-sales revenue is part and parcel of a dealership’s bottom line. It represents a more stable income stream especially when new car sales are going both ways. However, it goes a long way to stabilize after-sales revenue streams as vehicle sales depend on the conditions of the marketplace, the influence of supply chain disruptions or economic influences. High aftersales absorption means that dealerships break even in instances where sales decline.
Growth in electric vehicle sales will bring both opportunity and challenge to the after-sales business. Although less frequent traditional maintenance is required for EVs, new revenue streams include battery health checks and software updates, along with charging infrastructure. With the need for less maintenance on EVs, dealerships will have to alter their focus from basic services such as battery diagnostics, software updates, and charging solutions to maintain profitability in aftersales.
The after-sales market has been one of the foundational businesses of the automobile industry that generates steady revenues, even when economic outputs do not perform and when car sales are low. With the transformation of market dynamics, revenue stability in after-sales has become a strategic imperative for dealerships and manufacturers as well. Adopting innovative practices and leveraging emerging technologies will form a solid foundation for aftersales operations to guarantee long-term sustainability.
Lifetime Customer Value Focus: The Customer Lifetime Value (CLTV) is a metric that measures the aggregate revenue a business can reasonably expect from a single customer account. In the automotive industry, CLTV encompasses not only the initial vehicle purchase but also subsequent aftersales services, accessories, and future vehicle purchases. Aftersales service is paramount in creating maximum CLTV. By offering superior customer experiences, a dealership can establish loyalty, promote return business, and create more revenue. The retention of customers for service and parts throughout the vehicle lifespan forms a predictable revenue stream. A powerful aftersales business generates brand loyalty, ensuring repeat vehicle purchases.
Operational Efficiency: Operational efficiency in the automobile aftersales industry is critical for maintaining customer satisfaction while maximizing resource utilization to increase profitability. The implementation of advanced diagnostic tools will empower technicians to speedily diagnose and repair the vehicle, thereby reducing the time needed for repairs and cutting their efficiency wastes. The adoption of strong inventory management systems can help optimize stock levels, reduce lead times, and hence minimize downtime due to parts shortages. Identification of waste in the aftersales process, such as unnecessary steps, excess inventory, and idle time, can radically enhance efficiency. A continuous improvement culture results in continuous optimization and innovation. Efficiency in the utilization of workshops, productivity of technicians, and inventory management of spare parts is driven by improving absorption rates. Through the adoption of these strategies, an automotive aftersales business can greatly enhance operational efficiency, customer satisfaction, and profitability.
Business Resilience: Business resilience is key to sustainable operations, customer satisfaction, and long-term profitability in the automotive aftersales industry. It helps an automotive business predict, prepare for, and counter disruptions effectively, that is, economic slowdown, disruption in the supply chain, technology advancement, or a pandemic. High absorption rates minimize financial risks. Dealerships are more resistant to economic challenges or market disruptions. Automotive businesses can improve the aftersales absorption rate, achieve increased profitability, and improve customer relations through the proper management of these factors. Product Diversification: Different varieties of aftersales services, such as vehicle customization, installation of accessories, and insurance products, offer ways to spread risk in case the demand for those services fluctuates. Geographic Diversification: Venturing into new markets or regions allows for the dispersal of risks and minimizes dependence on a single market.
To increase aftersales absorption among dealerships and repair shops, some areas can be incorporated to improve this service including Scheduling can help reduce idle time among the technicians in the workshop, maximizing available time Use of Training:
A well-trained person can diagnose and repair better or sooner, thereby saving labor and increasing customer satisfaction Use of Technology:
Advanced diagnostic tools and software can accelerate the process, improve accuracy, and take less time to make repairs. Implement proper inventory management: Proper inventory levels can decrease holding costs and will improve cash flow. Focus on customers: Provide high-quality customer service like on-time repairs, proper communication, and comfortable waiting areas for better customer satisfaction and loyalty. Offer added value services: Upsell additional services like detailing or installing accessories to increase revenue and improve the absorption rate. An Analysis of Service Data: Tracking key performance indicators- such as labor hours, parts utilization, and customer satisfaction identify for improvement and optimize the operation.
Takeaway from this article:
The Aftersales Absorption Rate is not just a financial metric, it’s a dealership’s resilience and adaptability in changing market environments. As a result of this management, fixed costs are controlled while improving service efficiency, customer retention, and parts sales, leading to an absorption rate that can keep the profitability sustainable in the long run. In this day and age of technological advancement and surge in electric vehicles, the after-sales business remains a critical revenue stream; hence, dealerships that maintain a focus on this performance metric and innovate through their product offerings would be better prepared for the future of automobiles.
Exclusive written by Muhammad Rafique for Automark’s December-2024 printed and digital edition.