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The Link Between Sales and Absorption: To Sell More, Service More!

By Robert Currie and Matthew Hicks, Currie Management Consultants, Inc.

Every dealer wants — or needs — to sell more. Whether from the manufacturer’s need or your need for more revenue, dealers continue to look for ways to sell more. A good place to start selling more machines is to look first at your parts and service departments. There is a strong link between sales coverage and better parts and service profitability — meaning better absorption. This article shows why.

From our work with dealers over the last 35 years we have examined why some dealers are achieving their revenue growth and market share targets while others are not and who often complain that they are spending too much on their sales effort for the results they achieve.

The short answer for the difference is that the better dealers have more sales people, and more management of them, than the average to poor performing dealer. But there is a reason why they have more sales people which we’ve found by knowing the characteristics of dealers at various levels of performance.

Let’s focus on the high-performing dealers from whose success we can learn. Of the characteristics, there are three that stand out.
1. Strong Consistent Sales Management
2. Assigned Accounts & Accountability
3. Balanced Sales Mix (represented by Strong Absorption)

In future “Planning for Profit” articles we will discuss Sales Management and Account Management. In this article we’ll focus on a balanced Sales Mix and how it contributes to more equipment sales.

The fact is that high performing dealers have better coverage because they have high absorption — not the other way around! Because they have high absorption, these dealers are more confident about the condition of their business and with this confidence they are comfortable spending more on sales people than average or low performing dealerships. More sales people means more sales!

The Sales Strategy of High Performance Dealerships “A Strong Mix”
The strategic difference for the dealers in this high performing category is that they are focused on selling after market or product support as well as machine sales. They have a strong sales mix which includes parts, labor and rental volume. They achieve solid gross profits in these three departments, and they manage their expenses will.

The high performance dealers did not start by increasing service or parts sales — their perspective is to provide complete and total solutions for their customers. They want to capture all of the possible spending from these customers. So they do not look at a prospect for only the equipment that that account can provide — instead they look at the potential for the customer’s complete business. This can include adding complementary product lines if it helps provide a total solution. But their first approach is to deepen the penetration of sales into existing accounts by selling more parts and service, as well as capturing new customers by selling their parts and service capability. This strategic total account selling means that as a company they value the customer and see more total potential business from each account.

To illustrate the concept let’s look at the total sales and profit potential over 10 years for one hypothetical customer. Consider a customer who purchases $2.5 million in equipment over that time with a 10 percent margin (or $250,000 in gross profit from machine sales). In this example, this customer provides $37,000 net profit from machine sales after all expenses, but the entire potential for parts and service is worth almost that much again. The total account will cover $167,000 in payroll expenses, plus the $35,000 in Service Wages (Cost of Goods Sold) so that the entire account will bring in $200,000 in wages and personnel expense coverage in 10 years. This is a much different perspective for expenses coverage and profits that the just looking at the commission on equipment.

Highly Absorbed Dealers Invest in More Sales and Promotion Expenses: “More Coverage, More Sales”

Given the approach to customers for their total business, these high performing dealers build a stronger dealership from the ongoing revenue stream of aftermarket sales. Because they create a dealership with high sales mix from parts and service, they maintain good gross profits and cover their total expenses — meaning high absorption.

But the high performing dealers do something that the average and weak dealers don’t do: They spend money!

From our Best Practice Group research covering industries such as Material Handling, Construction, Agriculture, Transport Refrigeration, Industrial Compressors and Power Systems we find that dealers who were at or above 100 percent absorption spend on average 17 percent more on capital equipment sales people compared to dealers with lower absorption.

Because these high performing dealers are confident of covering their total dealership expenses, they are more willing to hire more sales people. Putting aside for now the better sales management and sales process of high performing dealers, by employing more sales people these dealerships have more ‘feet on the street,’ more awareness of what deals are happening and more closed sales. And because of their approach, they spend money on sales people in the field to sell parts and service as well as equipment.

Chicken or the Egg?—Sales or Absorption?

In this case we know the answer: THE CHICKEN! And the Chicken is solid absorption.

When the dealer has good strong absorption they spend more on sales people. Those sales people visit more accounts, see and quote on more deals and close the sales!

So, if you want to be a high performing dealer, we would recommend that you first start strategically focusing on the total account potential, develop your business to achieve 100 percent absorption, and then aggressively add more sales people. You’ll be glad you did. What are you waiting for?