A CEO’s primary responsibility in every public company is to maintain the company’s survival by ensuring the bottom line meets or exceeds projections.
Private business owners have the same prime directive: to preserve their business’s survival by ensuring the bottom line meets or exceeds the industry benchmark. In private companies, we owe meeting this directive not to an unknown public shareholder, but to our families, staff and customers.
I commonly hear dealers say things such as:
- “I don’t think our customers will like a price increase.”
- “I don’t want my customers to think I’m robbing them!”
- “Raising my p rices might upset my customers.”
- “I’m afraid my customers will walk.”
Does this line of thinking agree with the prime directive of private business owners or CEOs of publicly traded companies?
An October 2021 press release from AGFA (a digital printing conglomerate corporation) illustrates proper pricing adjustments. It said: “For the third time in less than 10 months, AGFA will increase the price of its offset printing plates and chemicals. … The specific—but double-digit—price increases will apply from Nov. 1 onwards and will be communicated directly to AGFA’s customers.”
If needed, would you do the same? Do you believe this example is a radical response to the present business environment and real-time national economic realities?
Let’s contemplate this example differently. Would you walk into your showroom and start giving customers $1,000 checks for no compelling reason? It is important to understand that every time you forego a necessary price increase you shrink your bottom line. You are effectively handing out stacks of cash and putting your business’s future in jeopardy.
To keep your dealership healthy and to follow business owners’ prime directive, turn your pricing model upside down. Rather than forego price increases out of fear, decide what your bottom line must be to thrive, then determine how to earn the necessary amount. To remain viable and thrive, you must pass higher costs on to customers or improve efficiency.
Pricing Factors Are Key
Many factors are involved in achieving an appropriate bottom line. This article merely speaks to one of them―pricing.
Where should your bottom line be? In the RV industry, your pre-tax net income after deducting all necessary costs at market rates should be at least 5% of revenue. Market rates include rent at fair market value plus wages for owners and other family members in the business (also at fair market value). Currently, many RV dealers are reporting pre-tax net income above 10% of revenue.
Why does achieving benchmark revenue rates matter? First, because a down period will come, and although sales will fall and revenues diminish, on that day your expenses will likely continue at the same rate. You will be burning money.
Second, when you call your banker to borrow money, or when you call me because you are ready to exit and sell your dealership, you will likely expect the selling price to reflect all your career’s hard work, time and money you invested in building the business. You will naturally want top dollar.
When deciding to sell, some business owners face the hard truth that the dealership’s whole value rests on the bottom line’s history. If you fail to make money, you have yourself a hobby, not a sellable business.
Strategy in Inflationary Times
When costs rise, public and private companies have two options: increasing prices or improving efficiencies.
We are living in inflationary times. Globally, costs have risen fast and may continue to do so. Bear in mind, the business world is a level playing field for everyone. The dealer down the road faces the same costs and subsequent pricing increases as you. If he is not raising his prices in lockstep with you, he is running a short race. Remember your prime directive: company success for your stakeholders’ benefit.
Can consumers go elsewhere? Not likely. Everyone faces many of the same costs. If consumers visit another dealership, they will likely get similar pricing but potentially poorer quality service or products.
Will higher prices drive customers away, making them disinterested in the RV lifestyle? Today, wages are growing at virtually the same rate as the price of goods in America. Customers are unlikely to leave RVing merely because of price increases. People pay for what they value and the perceived benefits the purchase provides.
What about the impact of higher consumer prices on staff? We all regularly attend manufacturer/dealer meetings and other trade shows, where vendors use various visual effects to tell us about newer, better, shinier products.
Do manufacturers absorb cost increases? For the most part, no—they pass those increases on to you, the dealer. At Elkhart Extravaganza, manufacturers entertain dealers to woo them to their brands and new models. Rather than absorbing price increases, manufacturers train their employees to communicate why the new version is better and to justify the higher price. You, as their customer, then make your purchases, often despite the higher price.
As dealers, our job is to also train our salespeople and all staff who function as your business’ promoters. In the press release cited earlier, AGFA likely had company meetings to provide a pep talk to employees to get them excited about selling the new (more expensive) products. Executives probably empowered them with tools to answer and overcome customer objections and pricing complaints.
I believe it is important to include service technicians, other fixed-ops employees and back-office staff in your price increase pep rally. Every team member must be sending the same positive message. When we need to raise prices, our job is to train our team, who will then tell our customers why they should be happy to pay more.
Costs always rise—sometimes at a faster rate, sometimes slower. You have two options: raise prices or become more efficient. Product pricing models rarely change because using a percentage of the cost to set the price is common practice. When costs rise, so do prices. But do prices rise enough?
Currently, the costs of staff, insurance, advertising, fuel and other “overhead” items are growing rapidly. Sticking with an unchanging percentage pricing model may not compensate for those overhead items increasing at their own rate.
Review your total overhead expenses as a percentage of gross margin over the past few years. Make sure the percentage remains consistent with overhead. If fixed costs are taking a bigger bite of profit, the time is right to increase the pricing formulas’ gross margin and markup rates.
In the pricing formula table example, the shortfall is the dollars dealers leave on the table when their overall profitability decreases just a few points. During inflationary times, you may need to adjust your pricing margin settings to maintain your bottom-line profitability.
Using a multiple of 3x on three years’ average shortfall, the loss equates to more than a $500,000 reduction in a business’ overall value.
Have you heard about matrix pricing? Matrix pricing is a model where the margin on some items is lower than on others. The tool is employed by Walmart and many, if not all, other large retail chains. Commonly, the items local customers most care about may be listed at lower markups than other products. Retailers recoup the margin by selling ancillary items once a consumer is in the store.
Walmart uses matrix pricing to attract its customers. For example, in an area with many young families, Walmart will advertise the lowest price on boxes of diapers. However, the retailer’s prices on chips and soda may be higher than other local competitors to offset the difference.
What are “the diapers” in your dealership’s local RV customer demographics?
Dealers also can seek ways to run organizations more efficiently to increase profit.
As an example, consider your experience the last time you checked in for a flight at an airline. We used to check in face-to-face with one or two airline employees working at the head of each line. Today, only two people are available to help all travelers. Consumers now use automated kiosks, reducing the number of employees needed.
Walmart is yet another great example. The company has virtually no cashiers today, thanks to automated self-checkout lines. One supervisory cashier monitors five to 10 customer stations as consumers check themselves out.
While we likely do not want RVers visiting our dealerships to have a similar Walmart experience, look around your dealership for opportunities to streamline your processes. Over time, small changes equate to big savings.
In one larger dealership I visited, the employees filed paper copies of work orders by the customer’s last name. Here was an opportunity to improve efficiency. Filing by last name took someone days each quarter to put away a huge work order stack. I asked why the dealership did not file the work orders daily using a number system.
“Because we won’t be able to find Fred Smith’s order if we ever need to go back to it,” the leader told me.
I asked if the dealership could find Fred Smith in the dealer management system (DMS) in the rare case they need to pull a past work order. Would the DMS tell an employee the related order number? It did. Looking up a number took far less time than filing by name.
Changing the filing system saved two to three weeks of labor hours annually and took little time to implement.
In another dealership, the sales team used a different system than the DMS. A manager manually retyped every RV sales deal into the main system. The manager’s compensation was at a much higher rate than other employees. Had the dealership spent a few thousand dollars to train the sales staff how to properly use the DMS and enter orders, the sales manager would be freed up to spend more time managing and training salespeople. His time reallocated would very likely increase gross sales. Imagine if the sales manager’s work resulted in selling just one more RV each year. That sale would more than pay for the sales staff’s initial DMS training.
To improve efficiencies, consider having parts/service implement the following proven processes:
- Ensure parts are picked for the next day before parts employees leave for the day.
- Ensure all parts are in inventory for the next RV in for service before requesting the RV be pulled into a service bay.
- Dedicate a parts employee who is responsible for ensuring technicians have what they need the moment they need it.
- Improve service scheduling. The next RV should be ready to slide into the shop as the current RV is pulled out. Techs should use the transition time to clean up and prepare for the subsequent job.
- Get service techs off the forklift and reallocate their time to spinning a wrench at the shop’s billable rate. Let a lower-cost yard porter move RVs in and out of service bays. Service tech costs misappropriated equate to lost billable time at the shop’s rate, not costs at the tech’s hourly wage.
- If manufacturers allow, ensure your warranty rate is billable at the customer pay rate. Make sure the customer pay rate is actually listed at the market rate.
- Quote a reasonable time to perform each job, including RV pull-in and pull-out time.
- Stock only parts inventory that turns a minimum of five to six times each year.
- Fully utilize the DMS. Prevent staff from taking extra unnecessary steps by ensuring both front- and back-office personnel are trained and using the same system.
- Use seasonal and part-time staff to cope with seasonal industry fluctuations.
The day will come when you exit and sell your dealership. When you do, your past results over time must show revenues at or above industry benchmarks to realize a top-selling price for your business. Prospective buyers and bankers will look at results from the last three to five years. Start preparing for someday right now.
In the End
Public companies calculate their required bottom line and then ascertain how to achieve the bottom-line projection. Dealers, however, often decide what they can charge consumers without using math or metrics to determine prices. In the end, dealerships often absorb the difference. Dealers need to study how their public company cousins structure pricing, and then apply similar solutions.
Turn your pricing model upside down. Rather than predetermining what you can charge and absorbing any shortfall, assess your required bottom line to realize your target profitability. Then, determine how to get your bottom line there. Changes might include raising prices, improving efficiencies or doing both.
Most important, remember your prime directive is to maintain the company’s survival by ensuring the bottom line meets or exceeds targets.
Carrie Stacey is the owner of Stacey & Associates, a company specializing in business valuations, mergers and acquisitions, consulting, coaching and benchmarking geared at dealerships. She is a licensed CPA in the U.S. and Canada. She also worked as general manager at both marine and RV dealerships. Additionally, early in her career, Stacey spent several years in professional sales.