Demarest: Beyond Benchmarks

It is common for shops to set targets for overhead based on a percentage of sales, including advertising. But using any sort of benchmark as a hard and fast rule would be foolish—not to mention dangerous.

If you came to this article to get a benchmark figure, you can stop here and I will tell you my shops spend an average of 2.8% of their sales on advertising. Unfortunately, it’s not always that simple and if you take that as a hard target you could easily make the wrong decision. Let’s say that you have a brand-new shop doing $500,000 this year, but you are looking to grow it to $2 million in 2 years; you will never reach that goal if you spend 2.8% of your current sales level. Since 2.8% of $500,000 in sales is only $1,200 a month in advertising, that number will become relatively small pretty quickly as the sales levels rise. The general target that I see for shops is spending 3 to 6% of your desired sales level in advertising dollars. That means that if you want to grow 3 times your current size, your advertising dollars in the short term are also going to look relatively large and ideally grow to be in line as the sales follow.

However, this is still an oversimplification of the numbers because it makes a lot of assumptions. It assumes that the constraint on reaching your desired sales level is in demand or cars, it assumes that you are using advertising dollars effectively and getting value from advertisements, and it assumes that you are doing all the right things to make your customers happy and keep them coming back. In reality, I would argue that most shops choose to spend more money on advertising rather than fixing the root cause of their issues.

Are New Customers Really the Issue?  

Determining whether new customers are really the issue takes time to do some self-reflection and really understand the pinch points in your business. A lot of times when shop owners see declining sales or declining car count, they instantly turn to advertising to fill up their bays. However, when examining the numbers, some owners realize that getting new cars would just compound their problems.

There are actually a number of pinch points that financially look the same as having a low car count or demand issue. For example, let’s say every three phone calls from prospective customers turned into an in-person appointment in the past. However, recently you notice when you have car count issues, the number of calls have been consistent but appointments are dropping. So, is that a service advisor issue, a scheduling issue, or something else? Adding more cars to a growing problem will not only be more costly but may not deliver your desired outcome. Similarly, if you think a car count issue will be resolved with more cars but you actually have a production issue, not only will you not increase sales, but you could upset prospective customers by not providing timely service.

When it’s Time to Advertise

Now let’s say the counter is selling work, you’re getting customers in the door, and the shop is cranking out work, but you just need more of it. You need to advertise, so you decide to hire a marketing company to get more cars. But first, you ask your accountant if you can afford to pay an advertising agency $5,000 a month and the answer is it depends if it’s going to be a good return on your money. If that $5,000 turns into $10,000 worth of work, then there is absolutely value and you can afford good advertising because it pays for itself!

But it also depends on whether the advertising is bringing in the right type of customers. While it may seem great that you brought in 10 new clients, if they don’t approve any work, you didn’t actually gain anything. In reality, you need to be able to measure the value coming from all your advertising sources and it starts with tracking this in your shop management software. If you accurately track where all of your clients are getting referred from, you can make these types of decisions. But if you have no clue where your customers are coming from, then you are left analyzing cost and not value.

Is Advertising Necessary?

I said that my shops average 2.8% of their sales in advertising, but really we have two different types of shops—those who spend money on advertising and those who don’t. The ones that spend money are generally in the 5 to 5.5% of their sales range, whereas the other half of our shops spend virtually nothing on advertising. Which shop is going to be more profitable? Which shop is going to be easier to run?

The truth is some of my shops don’t spend money on advertising because they are not trying to grow. If you are doing $2.5 million out of a two-bay shop, you probably don’t have that much more potential to increase your sales. On the other hand, a lot of these shops are still growing 10 to 20% per year (and have been for years) with no advertising, and I think that should be everyone’s goal. What I find is that these shops have built such a reputation that they have virtually no churn on their customers; instead, their average customer is a customer for life.

If you are losing 20% of your customers a year, imagine how much advertising you would have to do to just maintain your existing sales level. Instead of throwing money at a potential problem, make it a point of reflection. What do you think is cheaper—advertising or fixing internal issues to give your clients a better experience and keep them coming back?

Business would be a lot easier if you had hard targets to hit without any variables, but the reality is business is much more complicated than that and advertising is arguably even harder. Take time to understand your business and figure out what is really causing the issues that you think advertising is going to fix. You might be surprised.