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The traditional cost accounting structures that we all have used, start from the false premise that there is really only one cost. Total Cost. And then we start messing with that which is a variable cost, personnel for instance, and that which is a fixed cost, rent for instance. We try and increase the variable cost and decrease the fixed. This is all fine and dandy and has served us well for many years yet it leads us to poor decisions. For instance during the eighties when operating costs were under serious scrutiny we looked a people costs and productivity measures and cut head count. We also moved capital assets off the balance sheet and took on operating leases. We got pretty good at gimmicks.

But the true cost of our businesses is the cost to acquire and retain customers. Who tracks these costs? How does your accounting system track these costs? I think you will agree with me that the answer is clearly not very well.

I am not here to cast blame or say our systems are not doing their job. No rather I am suggesting that we as managers are not doing ours. Technology and engineering is way ahead of management these days. There are tools available to us that we have not started using and really don’t understand how they would help us. The equipment coming from production lines today is so far superior to what we had even as recently as five years ago it is staggering. Yet what has changed in how we manage. From any aspect of the job; personnel, processes, customer service, profitability, market coverage, there have been significant changes. But what has changed in management?

I suspect you have all done the exercise to calculate how much it costs to generate a parts sales order, or a work order, or a purchase order. These are good pieces of information to have but only if they are used in the right way. How much does it cost you if you lose a customer?

You have all heard me nagging about customer retention over the years. You have read how I measure it. But have any of you actually calculated your own retention in the parts department or the service department? Very few have and that truly is a shame. And that information is priceless. It will put a serious dent into your egos when you see the actual number of customers that leave you each year. In the Product Support Opportunities Handbook published a few years ago customer told us that 44% of them had left the OEM dealer and had service done from other sources. What size of hammer do we need to be hit with before we take action? As many of you have heard me say to “we have been so successful at how we perform our jobs in parts and service that we have lost over half of the parts business and more than three quarters of the service business, I think we need to work harder in the same direction.” Of course that is a seriously large tongue in my cheek.

So back to the question of accounting or financial systems; Cost Accounting is fine to a point but in the world today we have a much more basic and serious need from or financial information. We must remember that information is a tool and data is not.

We need to know how much each machine we sell generates per year in parts and service. The Product Support Opportunity Handbook gives you a model to use. We need to operate effectively in all that we do; The Product Support Best Practices Handbook gives you some areas to review. And we need tot have skilled and trained personnel who know what doing a good job looks like and the starting Product support Handbook outlines all of the jobs and the standards of performance. But all that is wasted if we don’t know what it costs us to lose a customer.

The old 80:20 rule doesn’t apply to us. (80% of the sales coming from 20% of the customers) We are now closer to 90:10. Check it out for your dealership. And that high a ratio is truly frightening. What if you lose one of those large accounts? The results are not good, not just for the parts or the service departments but in fact for the dealership as a whole.

So back to the beginning: Do you know your costs? I say NO unless you know how much it costs to lose a customer and how much it costs to acquire a customer. What do YOU think?