How to Improve a Dealership’s Service Absorption Rate

by | Mar 26, 2025 | Growth

Improve the service absorption rate

Why Using the Service Absorption Rate is Important to Dealership Leaders

Industrial equipment dealers are similar to your local car dealerships, particularly those focusing on internal combustion vehicles rather than electric ones. They face comparable issues and challenges while exchanging ideas and best practices. Many industrial dealerships are family-owned or independently operated; even when run by a corporation, they often remain privately held. Since they invest their personnel capital, dealers tend to be cautious during stock market declines or rising interest rates, especially when their customers encounter significant economic difficulties such as tariffs and natural disasters.

Here is a paragraph from the Boston Consulting Group (BCG) about their take on the current economic environment:

“The need for strategic foresight—and the challenge of attaining it—was made plain in a recent BCG survey, which found that 40% of CEOs feel unprepared for market shocks in 2025. The same survey found that cost reduction remains the top priority, and two-thirds of CEOs plan to invest the savings from cost-reduction efforts into growth. It’s a lot to deliver in the face of mounting uncertainty.”

Many dealerships focus on service absorption rates as dealer strategies and metrics evolve. This rate measures how effectively the service department can “absorb” the dealership’s total overhead costs by generating revenue from repair, parts sales, and maintenance services. A 100% absorption rate indicates that the dealership will at least break even, even if it fails to sell products (whole goods) during slow sales periods.

Dealers use the service absorption rate for two distinct reasons:

  1. Prepare their financial house to survive during a period of slow product sales.
  2. Establish a clear goal for the service department to strive for as they work to enhance their business outcomes.

Here are two made-up stories about motivating employees to improve the business’s income statement.

Story #1 – I worked at a mid-sized public company. Our CEO called a meeting with her direct reports one day and said, “The Board is not happy. We need to increase our profits by 10%. Come back to me on Friday (two days after the meeting) with your plan to improve operations by the same ten percent. Also, let me know how many positions you’ll cut!” After the meeting, some of us gathered and exclaimed, “This is ridiculous!” Someone suggested we shouldn’t feel pressured for more profit since we were already performing well. We agreed that we couldn’t stand before our departments and issue the same orders, knowing everyone was already working hard. We met with the CEO, shared our frustrations, and urged her to return to the Board and explain how such an action would destroy morale and significantly impact our culture. We were fortunate because, in most companies, the call for short-term improvement would come without clear reasoning; heads would roll, morale would plummet, and we would lose some great people.

Story #2 – What if the dealership owner gathered her direct reports and said, “I have been speaking with some owners of other dealerships, and they have a Service Absorption Rate between 80% and 90%, while ours is only 52%. They also mentioned that their customers are thrilled, their principal OEMs offer them extra discounts on their products due to the high-quality feedback the OEMs receive from end users, and the employees compete internally to find ways to improve their operations while enjoying a refreshing break from the daily grind of working on products.” Then she said, “I would like to see our Absorption Rate reach 60% in four months. If we can achieve that goal, I will throw a party for the whole company and their immediate families. And, of course, I won’t quit setting new goals and having more parties until we catch up to them.”

Most service employees were ready to improve their dealership’s repair, maintenance, rental, and parts operations.

In the second story, the dealership owner used the service absorption rate to assess the service department’s overall efficiency and effectiveness. This is quite clever, as the rate remains independent of the specifics of their business and can be compared with other dealerships.

How to improve the service absorption rate

Improviing your service absorption rate is a slow process. The following is from a flyer advertising the upcoming dealership summit (the invitation to the conference is included at the end of this article):

Brad Meyer, director of service operations for Titan Machinery, highlights the impactful steps the 69 store Case IH dealership group has taken over the last decade to transform absorption from a metric into a deeply ingrained culture. This culture is built on the integration of robust business performance and Titan’s unwavering commitment to customer care.

Every year since 2007, Titan has increased its absorption a few points until in 2023, when the Case IH dealership group finally reached 100% absorption across all of its North American segment. Due to high floorplan expenses, the group dropped back into the low 90s in 2024, but Meyer shares the steps the organization is taking to get back up to 100% again for 2025.

There are several strategic levers to pull to improve a dealership’s service absorption rate through a combination of cost reduction and increased revenue. Here are some:

Ensure your installed base records are complete and accurate. The most effective parts distribution operations strive for inventory accuracy and completeness objectives that approach 100%. In contrast, few industrial OEMs and dealerships compare their customer records to ensure both parties know precisely who owns or has disposed of all the equipment sold in any geographic area. This database will be used by both service and salespeople to generate new business for the dealership. It is so essential that it is worth investing in a customer visit to verify the records.

 An end user can acquire equipment in numerous ways:

  • Purchase from a dealer
  • Purchase or trade with another customer
  • Purchase at an auction
  • Buy on eBay
  • Buy as salvage and try to rebuild themselves

Regardless of how a customer acquires a product that the dealership services and supports, it is in everyone’s best interest that the item functions properly since the OEM’s name is prominently displayed on the product. If it fails because the end user purchased a salvage item and attempted to repair it themselves, the narrative will spread that the product is defective without mentioning its previous history.

Update pricing. Adjusting parts pricing every quarter or more frequently may be necessary in turbulent times. One benefit is that annual increases (which you should enforce during stable times) are spread throughout the year. Remember that buyers compare current prices to what they previously paid, and the chances are in your favor that the increases won’t seem as significant if they all occur in January.

Also, expediting and shipping costs that arise from unexpected situations when selling spare parts should be included. For example, your dealership may stock all dynamic parts, e.g., wheels, gears, actuators, and chains. If a vehicle is in an accident and needs a body part, it may need to be shipped from the OEM with overnight delivery. You might have to deliver it to the customer faster than your usual delivery time. These are additional costs that must be passed on to the end user.

Finally, ensure that your labor rates generate the margin you plan to earn. This needed rate can change due to new taxes, increased cost of benefits, unexpected cost of labor, and certification. This cost should be reviewed at the same time as parts pricing is reviewed.

A business generating over $5 million should have a dedicated individual or team trained in pricing to ensure they neither leave money on the table nor are seen as price gougers. Additionally, remember that pricing is the only revenue-growth process that does not increase the cost of goods.

Equipment rental is also a service. Ensure you charge a favorable rate and unsell things like fuel, insurance, and damage repair.

Keep your income statement clean and ensure the service department isn’t charged for expenses incurred by other groups within your company. For example, when your company processes legacy equipment as a trade-in during a new sale, the sales team manages the entire process, and the final revenue appears on the Sales department’s Income Statement. This process involves sending the trade-in to the service department for remanufacturing to restore it to like-new condition. Confirm that the Sales department is charged for all associated expenses, including parts, allocated overhead, and the fair market value of the work required to complete the reman.

Ensure all sales are invoiced. This may seem trivial, but it can become significant if you’re not careful. For instance, in 2024, Finning Cat© reported revenue of $202 million from fuel and other items. When delivering a new product, ensure it is ready to go to work when it arrives at the buyer’s place of business, and then add a dealer’s prep line item to the invoice.

Provide paid consulting before sales. This differs from consulting during the sales process. In the sales phase, you address the challenges the prospect is encountering. In pre-sales consulting, you may visit the prospect’s workplace, interview key personnel, and identify ways to enhance efficiency. The solution could involve one or more of your products, offerings from other vendors, or adjustments to their workflow without making any new sales.

Make sure you receive fair compensation for all warranty work. Warranty work is essential because your performance will influence expectations for new customers. On the other hand, many OEMs are inundated with warranty claims, and the claims processors often act as if they earn a bonus for each claim they reject. Here are some tips to ensure you get paid promptly:

  • File claims that are complete, accurate, and on time
  • Return defective parts per the OEM schedule. Make sure all the required information is accurate and included
  • If your labor rates change, make sure you file the new rates when the OEM expects it
  • Train the senior warranty claims administrator to understand the rules and quirks of the OEMs you work with. Set goals and base variable compensation on the percentage of claims collected on time.

Summary

This article discusses strategic actions to survive a business slowdown and maintain or emerge as profitable. Each bullet point entails multiple detailed actions to achieve your desired outcomes.

Key takeaway:

Improving the service absorption rate is not your primary goal. It is one of the key performance indicators you utilize to gauge the strategic improvement of your service business. It acts as a target that employees can comprehend and strive to improve.

Most dealerships undertake this long-term process without collaborating with one or more experts. If you are unsure where to begin and need reliable advice, contact Sam to set up a complimentary call.

Related Reading

Point of information about an interesting and relevant conference.

“Join us on July 29-30, 2025, in Iowa City, Iowa, for two days of unrivaled learning and networking during the 2025 Dealership Minds Summit. Focusing on The Fully Absorbed Dealer theme, you will discover actionable, best-practice ideas to set your dealership up for future success.” 

You can download the schedule here.

Image by Siggy Nowak from Pixabay