Most of our mail these days comes from dealers who are trying to figure out how to get paid for the work their service technicians do.
At least a dozen readers, who want to maximize the performance of their fixed operations departments this year as the focus turns from sales to service, ask roughly the same question. "How do you get service pricing right?" Given the cost of technicians, and the competitive pressures dealers face from the aftermarket, it makes sense to spend more time on pricing strategies.
Since this is such a hot topic, we surveyed readers on the latest ideas and tricks. We wanted to find out what's working in dealership service departments.
There are three ways to sell service labor: Customer paid or "cash" work, internal jobs and warranty repairs. All three need to be taken into account when mapping out any pricing changes but for our purposes, we'll focus on the customer pay side of the business. Further, we'll break customer paid transactions into competitive, maintenance and repair work - all of which demand their own pricing structures.
Retail pricing strategies
First, calculate the shops effective labor rate by pulling 100 consecutive retail repair orders as a sample. You might to start with 200 to weed out the internal and warranty R.O.s
Divide the labor price on the R.O.s by the number of flat rate hours flagged. That will yield the effective labor rate.
This exercise should provide an accurate picture of the shop's work mix. Here's what the results might look like:
Work Group Average Rate % of work
Competitive $22.50 20%
Maintenance $38.50 35%
Repair $62.00 55%
This shop happens to have an effective retail rate of $52 - well below the posted rate of $70.00 per FRH. Also, the average technician pay rate is about $18 per hour. That gives the shop a current gross profit of 65 percent, which is below their desired target of 70 percent.
Considering that there isn't any way to change what the techs are getting paid, we have to move that effective rate up. This shop needs to have an effective rate of $60.
Repair rate is too low
Don't simply raise the posted labor rate. That will cause a stampede of technicians looking for raises. Instead, the service advisors have to do a better job of resisting the impulse to discount prices.
The next step is to look at another big chunk of work, maintenance.
By reviewing a few R.O.s we indeed find that the technicians are highly efficient at these repairs. While that is to be expected, several of the bigger services (like 30Ks) show techs that are 300-350 percent efficient. While this makes for happy techs, it is killing our gross profit.
For example, a 30K service pays the techs just over six hours on average. Although this is a maintenance service, the menu price is only $250. That works out to about $41 an hour for labor. To tighten things up, the job has to be re-priced so that the techs get only five hours pay, reflecting their improved efficiency. That's a hard sell at first, but it leaves the techs hourly rate intact. At that rate the techs would still be 250 percent efficient. Plus that brings pay back in line with what the typical store pays.
Under this scenario, the average for maintenance work could go up to $48.50 (from it's current $38.50), we'd end up with an effective rate of $57 - three dollars off from our goal.
The final piece would be the competitive pricing. Looking back there was a very good reason why this work was added to the mix and priced where it is. With pressure from their manufacturer and community standards they needed to be aggressive in certain repairs.
Since that is the case, the only thing to do is minimize the amount of competitive work in the shop. That is, reduce these jobs as a percentage of the shop's total work. Competitively priced work only makes sense if the advisors are up-selling additional repair work to the bill when necessary. By getting more maintenance and repair R.O.s in the mix, the shop has a good chance of hitting their goals.
Another way to minimize competitive repairs is to up-sell those jobs into more traditional repairs. For instance, the best example was using premium OEM brake pads for their most competitive brake service. If they switched to OEM discounts pads, aftermarket equivalents (like MotorCraft, or ACDelco) or even premium aftermarket pads (like good Raybestos) they could drop the parts cost and raise their labor rate. The point is to offer the customer the option of moving up the scale for some additional cost. Do they want a 20,000-mile pad, 45,000-mile pad or lifetime?
If their new pricing process includes keeping the total shop pricing and the influence of market driven variable labor rates, they can achieve the target effective labor needed to improve your gross profit.