Consolidators: Classic Collision Adds Second Location in Las Vegas
Only selling collision repair service these days? Diversification is the answer
to getting your profits back and making your business worth owning.
Body shops are a one-dimensional business in a multi-dimensional world. It’s like walking into a 50,000-square-foot Wal-Mart to find they only sell poinsettias! Think about how illogical that is: a 50,000-square-foot building with all the normal business costs and they only sell one thing – a product that people want to buy only once a year.
Worse than that is having a 20,000-square-foot business that has only one thing for sale that no one ever wants to buy – and they only need to buy it once every five to seven years! Of course, we’re talking about your average body shop.
Consider that no consumer on record has ever woken up on a beautiful Saturday morning, looked over at his or her spouse and said, “Honey, let’s go body shop shopping and maybe get some collision repair today!” Why? Because no one ever wants a collision repair. They may need it, but they never want or desire it. Therefore, body shops all over the world are selling something no one ever wants to buy, but they’re selling it to hundreds and even thousands of people each year.
To properly assess the impact of and opportunity for diversification in a collision repair business, you need to conduct a business analysis and examine a few aspects of the business, industry and consumer trends. In this article, we’ll look at:
Marketing costs and effectiveness;
Current return on investment (ROI) and profit margins;
Customer-base (customer bank) viability;
Potential business improvement; and
What others are doing that we can learn from.
Marketing Cost and ROI
Most body shops spend or invest an average of two to five percent of their annual sales towards some form of marketing. It may be a Yellow Pages ad, promotions, sponsorships, signage, direct mail, newspaper advertising, TV commercials, open houses, a Web site, fliers, penny saver circulars, etc. A shop’s annual
marketing expense may also include a marketing person who promotes the shop to insurance company agents and dealerships.
Other marketing costs may include the cost to participate and the concessions given to be on an in-surer’s direct-repair program.
The bottom line is that shops spend a sizable amount on marketing even if most don’t realize it, budget for it or record it as marketing on their profit and loss statements.
As a percentage of the average repair ticket, that five percent spent on marketing equals about $125. Therefore, we could say that the average body shop spends more than $100 per customer per year to obtain a customer and sell him or her one thing every five to seven years! Ironically, the net profit margin on a repair job is now only $200.
Even if the consumer wanted to buy something else, few shops offer more than collision repair and refinish. It may have been unimportant to offer other services in the past, but now it’s a huge opportunity. Again, why would Wal-Mart only sell poinsettias? Instead, the store became one of the world’s largest and most
profitable companies by being highly diversified.
More and more shops are being forced to consider alternative sources of revenue, customers and certainly profits. With profits falling off over the last several years to a current average of three to seven percent, most repairers are looking for some way to get their profits back and make their business worth owning.
Key Performance Indicators
A key performance indicator (KPI) that other industries use but body shops overlook is profit per customer per year.
Retailers want to know how much they gain from each customer and how frequently they can get them to buy. They also spend much of their strategic planning trying to find innovative and effective ways to increase the amount a consumer spends in a given time. This measurement also applies to collision repair businesses, even if it’s been ignored until now.
To illustrate this, I’ll examine the collision repair business model
using round numbers. Your average repair order is $2,500. At a 10 percent net profit margin, you make just $250 per repair. To track how many dollars that amounts to per year, we must consider how often a consumer might buy our product or service. If we only see the customer once every five years, we’re only earning $50 per customer per year! This pales in comparison to successful hair salons, bars, restaurants and mechanical repair businesses that recognize at least $500 per year
Another important KPI ignored by the collision industry is the size and value of its customer bank. After at least 10 years in business, an average shop will have seen nearly 10,000 customers. Chances are your shop has satisfied nearly 100 percent of these customers to nearly 100 percent satisfaction.
Regardless of this sterling effort, you have no other reason or opportunity for them to buy from you again unless they have another bad day. You have a worthless customer base that could be a customer bank worth millions!
Dive into Diversification
One way to look at diversification is opening and operating multiple profit centers. But most shop operators have a hard time seeing this because they view the business as having just one profit center with multiple lines of gross profit, but only one net profit line. To see it otherwise and operate different businesses under one roof can often lead to “business schizophrenia,” where you get off track and lose focus and control. Most end up losing sight of who their core customer is and where the profits are made and end up chasing whatever is most exciting and not what’s most profitable.
To avoid this mistake, look at the business in multiple dimensions and see the revenue and profit opportunities as layers that build and complement each other. Each additional profit center should wrap around the core, complementing it, building off it and adding to it but not adding additional complexity or overhead operating costs.
Let’s say your core business is collision repair and refinish and your core customer is the consumer. Let’s also assume that the three to seven percent average net profit is not enough. We know that it takes at least 8.33 percent just to offset the cost of carrying net-30 terms (since 30 days is the equivalent to one month or 1/12 of the year, which is 8.33 percent). Therefore, a shop must make more than 8.33 percent net profit to see a positive cash flow. Eight percent of a $1 million business is $80,000. Our objective is
to at least double that to make the business more viable and worth owning.
With that in mind, let’s examine how a body shop could become far more successful in this multi-dimensional world by becoming a diversified and multi-dimensional business.
Add-Ons and Up-Sells
Retail businesses have made the second and third sale one of the most important aspects of their business models. They understand that most of their profits come from the secondary sale that complements the first. A secondary sale is usually related directly to the main sale – the sale of shoe polish or socks after the sale of a pair of shoes, or the sale of a tie with a new dress shirt.
For a body shop, the first dimension or core business is obviously collision repair work. Therefore, the add-on and up-sell opportunity is selling the consumer on an unrelated scratch or dent repair or anything unrelated to the accident.
An add-on or up-sell item might also include selling the consumer replacement tires since the old ones are nearly worn. It can also be complete details, extra paint work, reconditioning the interior or offering “body spring tune-ups” like Ken Friensen of Calgary, Canada, did many years ago to overcome the ill effects of that country’s recession. Let’s use this innovative idea as
In theory, a body tune-up included much more than a detail. It was a procedure that every car owner who planned to keep their car for many years needed to have done to protect the underbody and engine compartment as well as prevent rust and eliminate the squeaks and rattles over the life of the vehicle. It was about ensuring that all of the salt and sand was off the car and out of the undercarriage, rails and everywhere else that could lead to body cancer through high-pressure cleaning, replacing corrosion protection and performing touch-ups where necessary. The body tune-up might have also included all of the other important aspects of thoroughly cleaning the vehicle, giving you ample opportunity to discover any other damage or repairs that needed to be done.
While the body tune-up concept or something like it isn’t part of the core business you have today, a shop could easily do this in the detail area it currently uses for cleaning the vehicle after the refinish. Lower skilled entry-level employees who may even work part-time could perform these services after hours and on weekends. The cost to perform this valuable service to your returning customers might be no more than $30 to
$50, while the revenue could easily
be $150. That’s an extra $100
Another example that doesn’t require creating a whole new product is adding a few accessories and car care items to your “waiting room,” or as I like to call it, your “showroom.” “Waiting room” im-plies that the customer must wait – something they dread and resent! A “showroom” is a place where you can show consumers items related to their second most valuable investment – their vehicles. Keep in mind that people who buy their cars keep them longer on average than they do their spouses (nine years versus seven years these days)!
Sprayed-on bedliners in rural market areas are a huge opportunity and you don’t even have to inventory the product or apply it yourself. Products like these can be outsourced just like an engine service, adding tires, nearly all of the other accessories, stereos and more.
Boyd Dingman of Dingman’s Collision in Omaha, Neb., is part of NAPA’s Car Care Collision program and has the ability to sell NAPA products to all of his past, present and future customers. It allows him greater freedom in his marketing choices than just
DRP, and he recognizes signifi-
cant revenue from this additional
Jim and Brenda Addison of Addison Auto Center in Denver, Colo., have a highly diversified business. Their original business was mech-anical repair but they added collision to complement it with a bigger ticket item. Now, they’re able to offer both services to their customer bank and retail car-care products as well. As they tracked the source for their collision repair business volume, they found that nearly all of it came from repeat customers from their mechanical services. Their Web site, which advertises that they sell automotive service from start to finish, shows that they have a
far different appeal to the average
Imagine the impact to your bottom line if you had something to sell to just 50 percent of your annual body shop customers. Let’s say the product averaged $166 with a 60 percent profit margin. Based on our shop example of $2 million in annual sales and approximately 1,000 customers each year, you could gain an additional $100,000 profit from this product alone! And, if the product was the right kind to fit into this diversification formula, it wouldn’t raise your overhead operating costs at all.
Beyond the add-ons and up-sells are the third and fourth layers of a multi-dimensional business. These dimensions are aimed at wholesale and bulk opportunities. As an example, if you had any products or services to sell that the consumer could buy more regularly, you could sell them to your entire customer base and keep them coming back while generating substantially more profit in the same square footage with the same overhead. Any product or service that’s appealing to a bulk of your past customers represents an opportunity far beyond a product or service that you offer as an add-on or up-sell at the time of the collision repair purchase.
Imagine what you could do with 10,000 past satisfied customers in your customer bank. A customer bank is a database that’s up to date with accurate records and filled with happy former customers eager to hear from you again about other auto-related issues for their benefit. Let’s say you had just one item to sell annually to just 25 to 75 percent of your entire customer bank. If the product had $100 profit, you could easily earn an extra $250,000 to $750,000 per year outside of collision repair! And keep in mind that not one of those
is related to an insurance company concession
Wholesale sources you might find to gain more business is fleet, dealership and, where it’s profitable and reasonable to do so, wholesale insurance work.
Note: I personally believe most DRPs have evolved to price concessions and discounting programs with arbitrary performance demands. They now ignore their original intent of raising customer satisfaction and efficiency between shop and repairer. Trends suggest these kind of programs may lead to dire long-term business consequences.
Retail industries other than collision repair are another good example to learn from. Consider “big box” retail operators or those that aggregated or consolidated their industry like Staples and OfficeMax. They’ve successfully leveraged one-stop shopping with massive buying and marketing power.
During the last recession, OfficeMax discovered that even its diverse product line wasn’t keeping its profits afloat. Ironically, a business unit it started as a complement to its core business, the “CopyMax Centers,” became its most sustainable profit source. Those centers actually generated more business and profit than its core business for a period. Its copy services brought customers in when cheap pens, paper and pencils weren’t enough!
For a collision business, a parallel example of the ancillary business or complementary profit center might be something like a glass shop, reconditioning center, detail shop or accessory business.
A great example of how one mechanical shop employed this model happened when it was faced with intense competition and decided to start specializing in 4×4 service. Over time, it became a 4×4 specialist and added accessories, too. Within a few years, its 4×4 specialty business eclipsed its service business. Then, when the recession happened from 2000 to 2003, the shop was able to rely on its accessories business with tires, wheels and everything else. It actually exploded in growth during a time when the rest of its business would have otherwise dried up. It’s now one of the largest 4×4 accessory and specialty shops in the country and even sells products online.
Customers for Life
A key to regaining ownership of your consumer customer is allowing them to connect to your business. Regular buying is one way that businesses gain loyal patrons. For the body shop that’s diversifying, the key is in those items you might sell outside of the collision repair itself. Add-on items are directly related to the original sale. Consumers scrutinize these closely and place a high expectation on the quality and delivery. Sometimes they’ll notice this first and most when picking up their vehicles. Therefore, it’s essential to avoid offering products sold at low profit margins at retail stores and cheap junk that wears out quickly. It’s important to stick with high-quality items that require some level of expertise and are specialty items available exclusively through your shop.
Keep in mind also that items the consumer may buy regularly (monthly, semi-annually, annually, etc.) can become more valuable and satisfying than why they ever came to you in the first place – collision repair! What you ultimately want is some way to sell them once and keep them coming back again and again. This is the art and science of owning the customer and keeping them for life.
What you would ultimately like all of your past, present and future customers to become is card-carrying members, but that will never happen if you only sell collision repair. It’s not reasonable to consider that a consumer will want to become a card-carrying member of your body shop based on buying something they never wanted and hope to never need again. However, consumer reaction to the diversified products and services you might offer is far different. It’s especially valuable if it means they become a privileged customer or gain special status.
Better than DRP
When most shops solicit and try to sell to agents, dealers and fleet accounts, they don’t have something new or interesting to offer that’s different from any other shop. “Low-cost provider” is often all that’s left when what you offer is nothing more than a commodity that has far too many suppliers offering it. Remember, there are probably too many body shops in whatever area you’re in, and all of them are desperately trying to get those same dealer and agent accounts, too.
To successfully grab these valuable accounts, you should determine what your unique selling proposition is and why they should do business with you. Perform a cost-benefit analysis and see if you can offer them something without it costing you too much to deliver. What can you offer that’s extra, different and more valuable than what others have to offer? Once you answer those key questions, be sure to package your offering professionally and use relationship-selling techniques. Wholesale business could become your core business, but if it doesn’t, it could still be a perfect complement to it. This kind of business fits best and makes you the most profit when it can be slipped into the slow periods between your normal business peaks and valleys. In a few shops, this kind of work can be performed at night or weekends in second and third shifts. It can be filler work that doesn’t interfere with delivering VIP service to your core customers but drives profits to your bottom line.
Profit Center Mentality
Even if you just managed your business by profit centers versus departments, you might find that each performs better and more profitably. What if your paint shop was an auto painting business? Would you run it the same way and only paint the cars brought to you by the metal/body department? What if your parts department was run like a parts store? Would you only sell sheet metal parts to the body/metal shop? Or, would you consider other parts to other buyers including those interesting to consumers? Would you only detail cars recently refinished by the paint department or would you offer more to more sources if your detail department were run more like a detailing business? And finally, would you waste the space for a fish tank in the waiting room and have old ugly pictures on the walls if you ran your front
office like a retail automotive showroom?
These are just thoughts to consider that might inspire you to think new thoughts and consider how you could transform your one dimensional business to better fit in our multi-dimensional world.
Writer Scott Biggs is currently the CEO and founder of Assured Performance Network, a shop-owned co-op founded in 2004 representing approximately 5,000 independently owned collision repair businesses in the United States. Biggs is the former producer and host of BodyShop Video Magazine and president of Business Development Group. He has received many awards and recognitions including Industry Achievement, Hall of Eagles, Most Influential Leader of the 20th Century and more. He has toured thousands of shops and delivered more than 850,000 hours of management education to the collision industry. His organizations have provided marketing, technology, management services and consulting to thousands of body shops worldwide since 1984.
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|A Visit to the Dentist
To find practice-proven answers to becoming multi-dimensional, let’s examine dentistry. The dental industry was in trouble at the end of the 1970s and early ’80s in that the revenue for a dental practice was limited and profits were nearly nonexistent. For the most part, dentists owned their practices to provide themselves with a job! They had a one-dimensional business with only one profit center. Consumers didn’t want to buy what they had to sell and only did so in a crisis. Dentists couldn’t just charge more since there was an overabundance of dentists for the volume of dental work available – too much supply, too little demand.
But dentists reinvented themselves and their industry in the 1980s and ’90s. The foundation of their reinvention was a strategy that repositioned their selling proposition and marketing message. While they kept their traditional services as the core or primary product of their businesses, they adopted the new marketing and selling proposition of “dental care.” They wrapped their future around “preventative service” and “maintenance.” These new product lines were regularly recurring incremental costs that complemented the core product. They were also desirable to consumers, or at least something they might want versus need.
Nearly all of the services they started packaging under “care” had always been offered, but only if needed. By giving the service a name, they were able to sell and market it. They were even able to develop a symbiotic relationship with insurers (creating their own, in some cases) to offer low-cost programs that would pay for the semi-annual service and encourage more people to consume with more regularity.
Here’s an interesting twist: Each year, dentists look forward to their annual rate increases by the insurers! That’s right, we’re talking annual rate increases of five to eight percent, not decreases or concessions. As the dentists reinvented their businesses and industry, they discovered they needed to package what they had been traditionally offering as a service into something consumers could better understand and more easily consume. And they needed insurers to help create the habit.
Consider this new and mutually interdependent relationship dentists developed as part of their reinvention and reengineering. Dentists and insurers, partners in their new world! Insurers need dentists and their “preventative” product/service to be able to sell a policy. In turn, dentists need the insurance program to obtain a sizable chunk of the market who will get into the buying habit and consume every six months. Dental insurance for the most part is pre-payment for a checkup and cleaning twice each year. The real “insurance” as we think of it is to cover the catastrophic needs that might arise from a major dental crisis. Packaged together, both sell more and gain a lot more.
Dentists now see customers nearly two times a year on average. Their annual revenue per customer is more than they made previously every five years, and they now have numerous profit centers and a foundation to add more. Most impressive is that most of the revenue (nearly 75 percent) is generated by lower-cost and lower-skilled labor than the dentists themselves. The result? Far greater gross profits on labor.
|Insurer as Model of Success?
Most repairers see insurers as competitors that comprise the “evil empire.” Given that, it might be a challenge for most to view them as an example of what they can or should do. However, insurers have gained phenomenal success employing a few basic business principles, specifically in the auto physical-damage world. Consider that insurers have gained huge success in directing or steering customers using DRPs.
Study closely how they’ve leveraged their ability to funnel consumers into one shop or another and have gained price and performance concessions, lowering their costs by as much as 30 percent or more in some cases. Insurers are also learning to use the consumer acceptance of these programs as a marketing edge. They have nearly every shop and every third-party entity willing to do nearly anything to gain their favor. When examining this successful formula, we can’t overlook the fact that insurers have an annual contract, annuity and revenue stream with consumers as well as high satisfaction ratings and customer retention.