Changing Your Business Model – Part One
The Only Constant is Change
The last year or so has certainly brought about many changes in the world of business, many of which had a profound effect on the independent auto repair industry.
Conducting business and viably competing in the new marketplace is requiring additional ownership skills, more staff, more working capital, more reinvestment of cash, more education, more training, and perhaps a change in owner belief systems for many shop owners. Let’s have a look at what the current and new business model may look like.
Over the past three decades we have seen many “mom and pop” types of businesses disappear because of market changes driven by big box stores and high-performance companies who operate on very large volumes. These entities were able to reduce the competition by earning significant purchasing advantages based on their sales volumes. Those purchasing advantages were then passed on to the consumer in the form of lower prices that smaller businesses could not compete with. Just take a long hard look at Walmart…the world’s largest retailer. With the advent of the new marketplace even Walmart is currently building a new business model on the change in their customer base.
The primary vision of most of today’s shop owners was to own their own shop. Most were certainly technically adept, but when it came to business skills, they lacked many of the elementary principles.
Most small shop owners started in this industry as technicians and for one reason or another elected to move from employee status to becoming small business owners. Motivations included the thought of being one’s own boss, greater financial earnings, more time off from the work routine of 40-50 hours per week, and of course to build something they could be proud of and eventually turn it into some form of retirement income. Their initial vision was really small, usually consisting of one shop with a handful of employees.
The industry model began with a technician working all day with the “business” of sales and processing of customers, and half the night with the actual work of servicing and repairing motor-driven vehicles. This was the “one-person” shop model. A part-time administrative person was usually engaged to handle all the paperwork.
The one-person shop model then evolved into that of hiring a shop “helper”, someone who was inexpensive and who could provide some assistance to the owner by doing some of the less skilled types of service work enabling the team to put out more work and earn more income. Along with the additional income came more phone calls, paperwork, and filing, which usually led to hiring a full-time administrative person. Ultimately, the one-person shop model evolved into the current model, which includes an owner, perhaps a service advisor, and two or three technicians. This model varies a bit with the number of technicians and advisors.
The general sales volume for the current model generates between $300-700k in sales annually with net profits ranging from loss to approximately 18% of sales figures. These examples and performance figures represent a majority of our industry shops.
While the current business model works for many, it is rapidly now becoming less viable and profitable. More of the services, and now some of the repairs are being subjected to commodity pricing, meaning there is less profit in providing them, and that is a result of many factors. Let’s look at some of those factors.
Pricing & Costs of Doing Business
The most common concern that we hear from the industry is that the shops are losing jobs to their competitors based on pricing. Customer loyalty is waning, and customers are moving around from shop to shop looking for lower prices. While sales techniques can overcome many of the customer concerns and objections, most of our industry does not employ what we would term, very well-trained and qualified service advisors. Therefore, jobs are going to shops with the best-trained service advisors or those shops quoting the lowest prices.
While prices spiral downward, the costs of doing business are skyrocketing. This trend is leading to an industry-wide concern about profitability. In looking at history, the grocery business went through a similar set of trials and the end result was that a great many mom and pop stores went out of business. Businesses that survived had to continue to grow, and at a pace that exceeded the increase in the costs of doing business.
The Challenge – Change & Serious Growth
The “Peter Principle” is the principle that, in a hierarchy, employees are promoted as long as they work competently. Sooner or later, they are promoted to a position at which they are no longer competent (their “level of incompetence”), and there they remain, being unable to earn further promotions. Peter’s Corollary states that “in time, every post tends to be occupied by an employee who is incompetent to carry out his/her duties” and adds that “work is accomplished by those employees who have not yet reached their level of incompetence.” This principle could easily be applied to most shop owners in our industry. Let me share with you why.
The majority of shop owners in our industry are on a quest to do it all themselves. Many strive to remain technically competent as well as master all phases of their business operations. They want to know how to do every aspect so that if they do it themselves, they do not have to afford to either hire someone internally or externally to do it for them. They also do not want to be in a bad position should they lose staff.
As each element of business becomes more complicated and requires more time, shop owners who are trying to do it all themselves become less and less competent in being able to do it all. At some point, they either collapse from exhaustion or give up and go out of business. A very select few continue by affording the staff and/or outside resources necessary to remain viably competitive and profitable.
We’re going to stop here today and discuss the new business model in our next post. Make sure to check back in two weeks for more! In the meantime, if you have questions on changing your business model or want to look into consulting with our coaches, give us a call at 425-988-6812.