The Service Margin

In business, there are many ways of calculating profit, but if you distill any of them to their essence, it is this: money in versus money out.  On the service side, the cost of doing business is parts, consumables like lube and rags, and overhead like rent and utilities.  But those costs pale in comparison to payroll. 

On the plus side is the amount you bring in for service, which in turn is the margin you're making on the parts your mechanics are installing, and the money you charge for fixing whatever needs fixing on your customers' bikes.

So if you want to calculate your service margin, you subtract the cost of doing business (overhead, payroll, cost of goods sold) from the gross brought in by the service department.  This is an important metric.  Too high, and it could be argued you're overcharging your clients or underpaying your mechanics (though not many managers will be uncomfortable with margins that are too high).  Too low, and you're just not making money.  Businesses that don't make money don't stick around very long. 

I had a talk today with my service manager about our service margin.  He explained that we could no longer track the amount of service our service writers were selling; that this metric had been important in the past.

I'm uncomfortable with this.

I'm uncomfortable because tracking this metric creates a very clear incentive to oversell service, which means you're going to be encouraging your clients to do things they may not need to do.  This is how mechanics and service technicians of all disciplines get the reputation for being shady and ripping people off.  This is how a person can go into one bike shop and get a $300 estimate, and desiring a second opinion, will be told by the next shop that it will only take $150 to fix his/her bike.  It does not build trust.

Don't misunderstand me.  I understand business, and I understand that, as long as I want raises, businesses have to grow.  That includes the service side of a bike shop as well.  I also understand that you cannot improve what you do not measure.  As a mechanic, I want to know what my personal service margin is.  I want to know how much I've made for the shop vs. how much the shop has spent to keep my grumpy ass behind the bench.  And if that number isn't favorable, I'm going to get my ass in gear, voluntarily or otherwise.

So it seems we're at an impasse.  How do you grow your service business without creating an incentive to oversell service?  Bearing in mind I have no hard data to support this assertion (like most of the assertions I have), it's like this:  when a customer approaches my service counter, I want to give him/her all the info s/he needs to make an informed decision about what we'll do to his/her bike.  I want to give him a good/better/best, and an explanation of what happens after he decides.  Don't want to replace the chain right now?  OK, but you will likely be replacing your cassette the next time I see you.  Don't want to replace chain and cassette?  OK, but your shifting is going to suck, and there's nothing I can do about that.  Don't want to clean and lube your chain?  OK, but you'll be replacing it more often, at a greater expense.  Any of these options are OK with me - it is, after all, your fucking bike.  But if I recommend something and you say no, I want us both to understand what happens next.  It's all about managing expectations. 

Happily and more often than not, my customers do what I recommend.  I replace a lot of chains and cassettes, and I do it with a clear conscience, because I know the safety and performance of my clients' bikes is better, which in turn will make their experiences more enjoyable.

But if my service manager ever tells me I need to start pushing my number, I'll tell him where to shove it.