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You’ve got to have the GUTS to charge for a good product

Ten to fifteen years ago Tom Peters wrote the book “In Search of Excellence”, it was a popular and bestselling manual for anyone selling a product in today’s market place. He commented that you had to have “guts” to charge a higher price for a good product.

Over the years I have known dealers who were selling the #1 product within the industry they were working. Yet despite the fact that they had the best product within their industry their margins on that product were little more than those others who were selling a like product. When asked why they failed to get more money for their product, as they were #1 in U.S. or global markets, they always had the tendency to state: “If we asked for more money we would no longer be competitive and would lose the sale!”

Ask ten of your top customers what your labor rate is and chances are they will have absolutely no idea. Ask the same customers what they expect of your shop and they will probably reply: “We want the job done right the first time, and on time, and we want minimum unscheduled downtime.” Ask that same customer what his cost is to perform his/her own service work and you will discover the customer does not have a clue and at best he will believe it to be the “hired-hands” hourly wage. Here again the dealer is hesitant to increase his labor rate for fear of being non-competitive.

Industry Cost of Doing Business Studies indicates that equipment dealers leave a tremendous amount of money on the table every year in their service departments. This is unfortunate and unnecessary and dealer survival will require putting a stop to all shop losses. Unrealistic labor rates are certainly not the only cause of un-profitability, but if not, they are way ahead of whatever is second on the list.

Equipment today is becoming more and more sophisticated. According to most dealers, finding qualified technicians to work on this equipment is becoming an impossible task. This has become a “chicken and egg” scenario for the dealer. If dealers don’t charge higher labor rates, how can they afford to hire and keep qualified technicians?

Check the rates you are paying to have your office equipment (copy machine, computer, etc.) serviced. Ask yourself how can they charge the rates they do to service this type of equipment out of a brief case? Ask yourself why you cannot charge a higher rate for a $100,000 to $600,000 piece of equipment with all types of computerized controls and electronic gadgets.

How do you establish your labor rates? Most dealers still run a check of all the local dealers in their own market and settle on what other dealers charge. Admittedly, this is partially because so many manufactures require dealers to do this. Some dealers look at the Cost of Doing Business Study and follow along with what other dealers do. But are these numbers accurate? Cost of Doing Business Studies report a typical labor rate of $80.00 (example.) The dealer has an internal rate of $40.00 and 50% of his labor sales are internal so in actuality the dealer’s overall labor rate is roughly $64.98 an hour and that just doesn’t “cut it” in today’s market place.

Ask a dealer why he sets his labor rate where he does and he will tell you that competition determines his labor rate. Ask the dealer who has the best shop in town with the best technicians and he will quite probably reply that he is quite possibly one of the best. What market research has been done on the competition? If your labor rate is $80.00 and the “shade tree” mechanic is offering $40.00, then he is half your labor rate and you cannot compete at a higher rate. What If? The “shade tree” mechanic took three hours to do a job when your dealership could do the same job in one hour. What If? The “shade tree” mechanic did a great job servicing your older models but knew absolutely nothing about the new equipment your dealership was now selling?  What If? The “shade tree” mechanic failed to guarantee his work? Answer these questions and more before you say you cannot compete against those “others” for your service business.

Take a long, hard look at some of the costs involved in operating your shop. Some of these costs are not reviewed on a timely basis and they are increasing yearly, while labor rates remain stagnant. Here are the common items that affect your dealership’s labor rate. 1) Technician wages, a major item, but do you also review the following items: worker’s compensation, federal unemployment taxes, state unemployment taxes, F.I.C.A., paid vacations and holidays, group insurance, employee pension plans, uniforms, overtime paid; 2) service manager’s compensation; 3) occupancy expense; 4) utilities; 5) interest; 6) liability insurance; 7) service training; 8) service vehicles; 9) shop supplies and tools; 10) office supplies, and many more common items which are increasing in cost on a regular basis. Ask yourself if these costs are going up, shouldn’t my labor rate increase to cover the shop’s increased costs?

Internal labor rates are the charge-out rates at which work is done for the sales, used and rental departments. Internal labor rates distort the profitability of the service department and are often done to make the profitability of other departments “look good”. Internal labor rates, however, can be devastating to your shop.

Internal labor rates also have a tendency to play havoc with the measurement of your shop efficiency and profitability. They also destroy the profit center concept of the dealership. If your dealership seeks a higher Absorption Rate, then all internal pricing needs to be eliminated.

Hourly labor rate vs. flat rates: Many successful equipment dealers have developed flat rate labor pricing. This is a program automotive dealers have used effectively for years. The program increases profitability and makes it possible to hire and keep top-notch technicians. Despite this, dealers continue to hesitate setting up flat rates, all because they do not believe it will work.

Equipment dealers too often argue that flat rating is too difficult to institute because of the variety of equipment they service and the conditions under which the equipment operates.

“It is too difficult to develop a flat rate schedule!” Most all manufacturers develop flat rates for warranty. While most dealers and service managers will argue these rates are unrealistic, they can be used as a guideline. If you believe the manufacturer’s flat rates are off by 15% to 20%, then adjust your own flat rate program accordingly.

Look at the advantages available to you as an equipment dealer by establishing flat rate labor pricing:  1) Profit can be increased by reducing job times. 2) Invoice disagreements can be eliminated. 3) Technicians can be given specific goals to meet. 4) The program can be used as the basis for a technician’s incentive compensation program. 5) Many customers prefer to know the cost before the work begins on their equipment. 6) Technicians efficiency and productivity can be easily measured at the time the job is completed. 7) The effects of efficiency improvement expenditures can also be measured.

If your equipment dealership is working with a customer service sales representative program, flat rate labor pricing allows the sales person to quote the customer in the field, to develop a sale on the site, and avoid the possibility of the competition having the opportunity to quote on the job.

Why not take the time NOW to review your service department’s labor pricing?  Have the guts to raise your rates a couple of bucks! Review your last year’s labor sales. Re-figure your last year’s sales with an additional three, four or even five dollar increase in your hourly labor rate, you are absolutely guaranteed to find your shop a whole lot more profitable!

We recognize that many of your manufacturers lock you in to a once a year increase in your labor rates. You may believe that since you just raised your rate you can’t do it again for another year. Recognize, however that this manufacturer limitation is for warranty purposes only. It has absolutely nothing to do with customer or internal labor sales.

It is your business, have the guts to charge a fair price for the quality service your shop performs. Your service department is there for one purpose and that is to produce a profit for the dealership.

For those of you who are interested in improving your shop profitability and your overall dealership’s profitability, ask for and we will immediately email you our manual entitled: Figuring Your Dealership’s Labor Rate. This manual is 30 pages and is specially priced for our readers at $16.99. In your email please include your name, title, dealership name and location, your major line of products and in which of our publications you read about this offer. If for any reason you are dissatisfied with this manual, let us know and you can “tear-up” your invoice. Email us at: and your manual will be on its’ way immediately . . . have the “guts” to establish a reasonable and profitable Labor Rate for your dealership . . . 

John R. Walker is president of Aftermarket Services Consulting Co. Inc. E-mail to contact John.