We’ve all heard the startling stats on business failures, and none of us want to join the ranks of the has-beens, so let’s take a closer look at Lawrence L. Steinmetz’s three primary causes of business failure.
First up, the only way that gross margin as a percentage of sales can decline is if a dealership cuts their prices or fails to raise prices when their costs rise. This raises a question: if we decrease our prices, can we make it up by increasing our volume?
Number two is that wages, as a percentage of sales, begin to increase. This normally occurs because a business has too many unproductive people standing around in a huddle bench racing, instead of coming to work to work.
Finally, the number three cause is that sales volume begins to increase. Wait a minute … why would an increase in sales volume cause a business to fail? Well, according to Steinmetz, "Inevitably some genius gets the bright idea that they can cut price and make it up in volume." This is a very easy trap to fall into.
Chalk Talk
1. They experience a period of declining gross margin.
2. Wages, as a percentage of sales, begin to increase.
3. Sales volume begins to increase.
"If that old, stubborn Tom at Re-Active Cycles across town can sell it for this, so can we," you think. However, business is not a game of volume, business is a game of margin. No matter how many units or how much P&A business your dealership does, it will ultimately fail if it doesn’t maintain an adequate gross margin, regardless of sales volume. The unfortunate truth is that if Tom at Re-Active Cycles across town can sell at that price and not make any money, so can you.
Speaking of Tom at ReActive Cycles, let’s dig a little deeper to see how his strategy is working. You may remember Tom Tyrant the dealer principal from the January issue. He’s not big on goal setting or leveraging the power of systems and processes in his dealership. Tom also doesn’t believe in sharing financial information with his team because it’s confidential.
Tom’s latest strategy to deal with the challenging market is to cut prices on his entire inventory. In fact, Tom has decided not to even charge freight or assembly because he is overstocked with inventory, and his floor plan expense is through the roof. Tom decides to get the word out by placing a full-page color ad in the local Town Trader. Although this ad costs $500 per week, Tom’s Trader rep has convinced him that his sales volume will increase, but it will take consistency. So, week after week Tom continues with his "No Junk Fees" and "No Sales Tax For Out Of State Buyers" marketing campaign. The sales team loves this one price, no-haggle concept, and they actually begin to sell more units. In fact, the salespeople simply take orders.
Initially, Tom is happy with his strategy because unit sales are increasing and his inventory is being reduced, but something is wrong: The floor checker just showed up, and Tom owes $225,000 for sold units, and the checking account is tapped! "Wait, how can this be?" he asks. "We’re selling more units than ever, and we even had a record-breaking 75-unit February and averaged at least $200 per unit."
Well, Steve Systems is the general manager of Pro-Active Cycles across town, and he’s feeling the effects of Tom Tyrant’s marketing campaign. It seems like every customer who comes in is mentioning Tom’s low-ball prices, but Steve understands that business is a game of margin, so he doesn’t keep score based solely on the number of units sold. Despite the temptation to cut prices and compete with Tom, Steve sticks with his game plan. He consistently trains his team on their sales processes, and Steve also monitors and strongly enforces their digital CRM. To ensure that every opportunity is maximized, Steve has implemented a new "Turn Over" system where management talks with every "up" before they leave the dealership. Steve has set expectations for his sales team, and each salesperson is expected to log five showroom guests and make 10 outbound dials every day. Steve has built a scripted response for dealing with hardball price shoppers, and his entire team is required to recite the script, which focuses on building value in their products, their dealership and the service their customers receive after the sale.
February sales were soft, and they only sold 62 units compared to last year’s 69. However, their margins remained right at the $1,200 per unit sold that Pro-Active Cycles is accustomed to. On one hand, Tom at Re-Active Cycles could be proud of his efforts. After all, he was able to sell more units than Steve at Pro-Active Cycles. But, let’s take a closer look at the numbers. Re-Active Cycles sold 75 units in February and averaged $200 in gross profit per unit sold, coming to a total gross profit of $15,000. Pro-Active Cycles sold 62 units and averages $1,200 per unit sold, coming to a total of $74,400 in gross profit for February. That’s a difference of $59,400 in gross profit!
Steve’s unit sales may have been off from previous years, but he still had a very profitable February. Tom’s margins were low, wages as a percentage of sales grew because of non-commission pay plans, but he did manage to increase his sales … sound familiar? I agree with Steinmetz, business is a game of margin, not volume.
