Skill Level Pricing-Raising Your Effective Labor Rate While Becoming More Competitive
By Gene White
Consider the results of a dealership vehicle sales department that, in an effort to simplify paperwork, priced all their new vehicles at the same price for any vehicle. They made a careful analysis of the range of vehicle prices and averaged them so they would make the weighted average gross profit they needed. An example would be a range of from $14,000 for their lowest priced vehicle to $26,000 for their top-of-the-line vehicle. The dealership then chose to sell all vehicles at $20,000 (for simplicity's sake $14,000 + $26,000 = $40,000. Consider the following: 1. What type of vehicles would they wind up selling? 2. What type vehicles would they not sell? 3. How would they sell low-priced vehicles?
By using a single rate pricing strategy in your service department, you are doing exactly the same as the example above.
You have many levels of work to be sold, from the lower-skilled labor performing lube/oil/filter change through brake and tune-up through engine and transmission overhaul services, to the high-skilled technicians performing electronic and driveability diagnostic work. Using a single weighted average labor rate or any non-skilled-based rate system, you systematically price yourself out of the lower-skilled areas, where 75%-80% of the vehicle's lifetime work is performed. The opposite is true of the high-skilled technical work where we become bargain-priced in an area where we have no competition. This high-skilled work is the area where we spend our largest dollar investment for equipment and training. This is also the area of highest comebacks and least likelihood to have parts in stock.
If you consider yourself high-priced in the "high tech" areas, evaluate some recent invoices for repairs to your copy machine, or your computer. The repairman's hourly rate is usually considerably higher than any rate you charge at your dealership, normally double. The repairman usually arrives in a three-piece suit, carries his tools in a briefcase, works in an air-conditioned area, with no rusty bolts, overheated engines, or mud, ice or water dripping off the equipment. After all this, we have the high-priced image and they don't, and they are not as highly skilled as our high-tech technicians are.
We must address the very basic question of who actually sets our labor rates in the marketplace. They are set by our competition in the long run. Since there are only a few items that give us a high-priced image, we must price ourselves back into this lucrative market. The items that give us this image appear in the local newspapers weekly and are defined by these advertisements.
We can't compete with a competitor's "tune-up" defined as changing spark plugs when we want to define our "tune-up" with all the bells and whistles-plugs, timing, idle, air adjustment, fuel filter, air filter, pcv valve, fuel injector cleaning service, etc. All the customer sees is that our price for a "tune-up" is considerably higher than our competitors'. Other items that we place in this same category are brakes, alignments, lube, oil, filter changes, cooling system service, transmission service, belt changes, tire rotation and balance. All of this highly competitive work is in the lower-skilled area.
I suggest you raise your customer labor rates to market conditions and let the warranty rate take care of itself. Normally we raise our customer labor rate when we are ready for a warranty rate increase. This is backward. The majority of your labor profit should be from customer pay work, not warranty!
Technician stumbling blocks
The single labor rate concept usually causes us to pay all our technicians at one labor rate irrespective of their skills. The result is the attitude among technicians, "Why get more skilled?" "I will not make any more per flat rate hour. If I am higher skilled, I will get more technical work that is more difficult and I will produce fewer flat rate hours. The end result is the higher skilled I get, the less money I take home." This single rate system also will keep us from defining a career path for progress from entry-level technicians to master technician or "high tech" technician. Paying all our technicians at one rate causes us to be unable to recognize technician skill progress. It also will not allow us to have a competitive cost of sale/gross profit structure. We need the lower-skilled mechanics at lower labor rates so we can maintain our labor gross profit percentage while selling competitively. After all, that is exactly what your competition is doing.
Concerns
Skill level pricing is not without its traps. When you establish the rates, you must maintain an effective rate based on your unique skill-level work mix that will justify your warranty labor rate from the factory. I know of no manufacturer or state that has rules against the concept of customer pay labor rates being higher than the warranty labor rate. Develop your dealership's fixed prices for the majority of work and publish this price in a list.
Unless the skill-level pricing system is installed correctly, service advisors tend to "under-skill" the work and sell it to certain customers at lower flat rate hour rates. The net effect is to lower your effective labor rate and raise your cost of sale, resulting in an erosion of your profit structure.
Any variable pricing system MUST have the ability to be locked into the computer system so service advisors cannot control your gross profit. Using a skill-based labor rate system requires management to evaluate repair orders routinely to control the problems discussed above.
We must use techniques such as skill-level rate systems to make it economical for our customers to do all their automotive work at our dealership, both maintenance and repair, and potentially body repair work. Remember, perception is reality to the customer. If the customer thinks we are high-priced then we are and in their mind we must be high-priced in the body shop and all other departments. When we do the pricing correctly, the customer will more than likely remember "we care" and we want all their repeat business, new car sales, used car sales, maintenance, repair, accessories, and body work.
Last but not at all least DO NOT SHOW YOUR LABOR TIME OR INDIVIDUAL PARTS PRICING ON THE REPAIR INVOICE given to the customer. I know of very few businesses that show this amount of detail to their customers. What is McDonald's labor rate or "Parts (and Pieces)" prices, or any restaurant's, or any airline's, or your dentist's, or your hair stylist's?
Gene White is president of Gene White Management Inc. He is a recognized expert and has conducted in-dealership evaluations and training (automotive, heavy-duty trucks, recreational vehicles and marine) for the past 22 years. gwhite@dealeronline.com
