Absorption rate: The margin most dealers are leaving on the table - and rarely measure
Most equipment dealers know their gross margin figure. Fewer keep a close eye on their absorbed overhead percentage.
And that's often where the quietest opportunities sit.
In nearly 20 years in capital equipment - I noticed that absorption rarely featured in the monthly management meeting. Machine sales tended to take centre stage, understandably. Absorbed overhead was usually there in a report somewhere, just not front of mind. It is a number worth bringing forward.
Here's what it tells you.
Absorbed overhead measures how much of a dealership's total fixed cost base is covered by parts and service gross profit - before a single machine is sold.
A dealer absorbing 80%+ of overhead through aftermarket alone is in a really strong position. Even in a slower sales month, the core of the business keeps ticking over - the technicians are busy, the costs are covered, and there's room to breathe.
A dealer absorbing 40-50% is leaning more heavily on machine margin to carry those fixed costs. That can work well in a strong market, but it leaves the business more exposed when sales soften.
In my experience, plenty of good dealers sit closer to that second figure than they'd expect - and usually for understandable reasons:
→ Parts pricing has drifted without a structured review
→ Service labour rates haven't quite kept pace with the true cost of delivery
→ Technician utilisation is a little lower than the service manager assumes
→ The aftermarket simply hasn't had the same attention as the sales floor
None of these are signs of a badly run business. More often they're just areas that haven't been looked at in a while - which is exactly why there's usually some real upside there.
The dealers who understand their absorbed overhead number, and focus on it as a strategic KPI, tend to be the ones in the most comfortable position when the market shifts.
It's one of the first things I look at with a dealer business, and it's often where some of the most worthwhile opportunities are hiding.
Do you keep an eye on your absorbed overhead figure - and have a sense of what's driving it?