Many dealers I speak with typically think that ALL profit is good profit. How can any profit be bad? But I believe there is such a thing as bad profit, and if a company continues to focus on growing its business generated on bad profit, ultimately it will hurt that company more than help.
So what is good profit? Any profit generated from selling a product or service, with a reasonable profit margin built into the pricing. Good profits do not cause distrust on the part of the customer.
As to bad profits, you cannot spot them by reading a financial statement. The results look great in the short term from a financial perspective. Revenue increases and dollars drop to the bottom line. However the long term detrimental affects far out weigh any short-term gains, because bad profits drive customers away.
So how do you identify a bad profit? Typically, bad profit is generated by taking advantage of the customer.
Let me give an example: airlines that charge baggage fees and also luggage carry-on fees. Yes, this generates a lot of profit for these airlines. But I argue that it’s bad profit, because it results in many customers choosing another airline.
For instance, Southwest Airlines does not charge any baggage or carry-on fees. If a consumer has a choice between flying Southwest and an airline that charges $25 for each bag (each way), and the cost of the flights are approximately the same, and the schedule for both flights is acceptable, which airline do you think they’ll choose? Southwest, of course.
Because of this, Southwest gets more customers and generates more good profit. So in the short term, airlines that charge for baggage do make profit off the customer but what does it do to that customer relationship over the long term?
In a dealership, an example of “good profit” would be profit generated from a car sale or a typical service job. As an incentive and gesture of goodwill, you may also offer items such as free high-speed Internet access in your service waiting area or free car washes. When I managed a large dealership, we had an automated car wash and every service customer received a free car wash.
While it’s true that providing Internet access and car washes have a cost associated with them, and it would be easy to justify to yourself why you should charge for them (“we have costs so we need to pass them on to the customers”) chances are you would never think of passing those costs to your customers.
Imagine if you charged your service customers $4.95 for Internet access, or added $3 to every RO for a car wash. This would be bad profit, because it would be highly likely that those customers would soon be looking for a dealership that was more customer friendly.
Another source of bad profit in dealerships is unnecessary upsells. Using technology to create an honest, transparent multi-point inspection (MPI) process ensures that your service profit will be good profit.
And in sales, avoiding customer questions on price to try and make another hundred bucks in commission is likely to backfire these days. The Internet is full of websites offering car-buying advice and tricks that car salespeople traditionally use to make more money. If a customer feels like they are being pressured to pay more than a fair price, they view it as dishonest and won’t return. Even if you get away with selling the occasional car that way, it’s bad profit.
As you consider new sources of profit for your own dealership, steer clear of “bad profit” revenue streams. Long term, bad profit has a detrimental impact on your brand. Good profit, on the other hand, generates customer trust and loyalty, which continues to generate even more good profit over time.