Parts Market Capture and HeadCount
In his blog post this week, Learning Without Scars Founder and Managing Member Ron Slee talks to readers about parts market capture and the headcount.
Parts Market Capture and HeadCount
One of the deep memories that I have is how much the parts counter and telephone sales job functions can become an endurance test to get to the end of the day. The phone is ringing constantly, customers and others are walking in for service, and they seem to come in Tsunamis: high hard and fast tidal waves. It is almost impossible at times during the day to keep up. This has been especially true since the early 1980s when the Heavy Equipment Dealer business model was changed.
In the late 70s inflation was out of control reaching levels we had never before experienced. Then Paul Volker, when Ronald Reagan was President, decided to fix it once and for all. At some points, interest rates went into levels in the low 20% range. It was catastrophic for many dealers who went out of business due to impossibly high levels of debt. The solution for most dealers was to cut down on people. The personnel expense was and still is, the highest “variable” cost in the business. So, they reduced the number of people on the counter, in many cases eliminated the Product Support Sales function, and cut back on people throughout the dealership.
It should be noted that the parts market capture rates also peaked in the late 1970s and have been in decline ever since. We just have not delivered the levels of customer service that were required by equipment owners and operators. Given our failure to deliver the level of service they had come to expect, they started to look around at the suppliers in their markets. Our customers found very willing competitors who wanted to sell them parts. Today we are somewhere in the range of market capture rates that are about half of what they were in the 1970s. From the 1970s to the 2010s we lost half of the available parts market to our competition. Rather unbelievable to consider, isn’t it? For the traditional parts market share leader, they went from the low 80% range to the high 30% range.
To some degree, the problem is that as an industry we don’t have a standard measure of market potential or market share. The equipment sales teams all have market share calculations to three decimal places. The AEM (Association of Equipment Manufacturers) produces statistics regularly for machines, but nothing for parts and service. By not having a measure available the parts department is given a pass on market share performance. We don’t know what the market share is so we don’t worry about it. I strenuously object.
We can determine our market potential and we can calculate our market share but it requires work. It is fundamental work. We have to know the working machine population in our territory. I believe the most significant question to ask today is why don’t I know my machine population? I have long written about, talked about at conventions, taught in classrooms and in webinars and in internet-based classes, the fact that if you don’t know your machine population you don’t know your business. I am very serious about that statement.
Today, less than half of the machine owners in any dealer territory have been contacted by an employee of the dealership. If you don’t believe me, check it out for yourself. Take a list of your parts sales by customer and sort it in descending purchases. The bottom 50% of those customers have not been contacted by an employee of your dealership in the last year.
I know, you will tell me that they didn’t buy enough to warrant the expense of a call. Wonderful. You will tell me they are so small that they don’t matter to you or your business. I disagree. If you are honest with yourself you will agree with me. Every single customer matters. One day they might replace a machine and who will they contact? You? I doubt it. You left them they didn’t leave you and I don’t believe that you deserve to be considered for that reason alone.
The other problem to consider is that you don’t have enough people to do that work. I agree with you. You have cut back on the number of people to the degree that you don’t have enough people left to do the necessary work. At the counter and telephone selling job function, we have become order processors: the men and women working their work with “their hair going straight back.” They never pick up a phone without someone on the other side of the call. Check it out.
In the 1980s I wrote a lot about the dealer models and again I brought it back in the period following 2008. We had a model, we had business metrics and measures, and we had standards. In the 1980s the standard parts sales per parts employee were $600,000 per year. This needs to get adjusted with variables of gross profit and average unit value of the part and the economics of the region. We had a standard of personnel expense in the parts set at 7% of parts sales. Putting that together, we had $600,000 sales per employee at 7% of parts sales which meant compensation equal to $42,000/year. By today’s standards and skill requirements that is low. Assuming a compensation of $60,000 then sales per employee go up to around $850,000.
Make the adjustment and then you have the proper number of people for doing the job the way the job was done in the 1980s. That means that we need additional staff if we want to contact “ALL” of your customers regularly. With new changes in market and customer coverage, you will continue to lose market capture and make yourself more vulnerable to competitors. Is that what you intend to have happen? I didn’t think so.
The time is now.