John Walker

Is your service undervalued?

When you undervalue what you charge your customers you also undervalue what you do for your customers! Equipment dealers continue to have a tendency to undervalue the services they perform on the equipment they sell. All too often dealers fail to realize that the equipment the customers buy determines their livelihood and business success. Most all of your customers cannot afford downtime and in particular they cannot afford what we refer to as “unexpected downtime”.

Surveys have concluded time and time again that one of the most important things customers expect from an equipment dealer is “to have their equipment serviced right the first time, on time!” Your customers’ most important requirement is the assurance that your dealership will take care of them after the sale. If your shop fails to generate a reasonable profit then how can you perform the jobs mentioned above for any, let alone all of your customers?

The service department in any equipment dealership is: 1) the most labor intensive and 2) expense intensive department within the dealership. It includes some very specific expenses which increase yearly (sometimes more often) and there are also expenses over which the dealership has little or no control: fuel prices, wage compensation programs, liability, etc. If dealers fail to keep up with these increased costs and ignore them when considering increased labor rates, then the department will be doomed to failure. If properly managed, it is a department that can provide a steady cash flow, increased sales and increased customer satisfaction indexes.

Your dealership needs to establish a strong and balanced price base before the dealership can begin working on service quality issues. How do dealers establish their labor rates? Unfortunately, most dealers run a check on all of the local dealers and independents in their own market and settle on a labor rate based upon what other dealers in the area charge. Strange as it seems, many manufacturers advise their dealers to practice this particular procedure. The practice of checking other dealers and independents’ labor rates is a practice of assuming that those others have some reasonable method to what they are doing, but that is not generally the case. The most important question to ask yourself is, “How much do you have to charge to enable your dealership to hire, train and retain excellent technicians, along with providing working facilities, tools, transportation, etc.?” In other words, your labor rate probably has more relevance to your cost of labor than it does to your retail competition.

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, we want fast response time, we want someone to be in position to assist us when we have a problem, in other words we want to know that you are available to take care of us after the sale at a fair and competitive price.

In answer to these comments you might well mention the fact that your dealership has less than 1% of your total service sales that are re-do work (if that is a true statement), and that if for some reason you make a mistake, there will be no charge for doing the job over. You might also mention that you have someone on call 24 hours a day, 7 days a week and 365 days a year to handle their service requests. But for this the customer must be willing to pay the additional cost.

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. It is a “seller’s market”, and this becomes a “chicken and egg scenario.” If you don’t charge higher labor rates, how can you afford to hire and keep experienced and qualified technicians to satisfy the customers’ wants and needs?

Instead of checking your competitions’ rates, check the rate you are paying to have your office equipment (copy machine, computer, etc.) serviced. Then ask yourself how they can 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 $20,000, $60,000 or even a $250,000 piece of equipment equipped with all types of computerized controls and electronic gadgets.

Take a long, hard look at some of the costs involved in operating your service department. Some of these costs we neglect to review on a timely basis and they are increasing yearly, while your labor rates remain stagnant. Here are the common items that dramatically affect your dealership’s labor rate: 1) technicians 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. No one has to tell you what is happening to your fuel costs. After you have reviewed all of these costs and recognize how they have increased over the past year then ask yourself: “Why shouldn’t my labor rate increase to cover these increased costs and provide the service department a reasonable profit?

In development of your service department’s labor rate, two researched numbers are imperative for you to discover. The first number you must discover is: What is your dealership’s true labor rate? You may feel a bit “cocky” and “comfortable” by saying your labor rate is $98.50 an hour and is 48% of your billable hours. What if however your internal labor rate is $49.25 an hour and 29% of your billable time is internal. Now what is your true labor rate? What if your supplier pays you $50.00 an hour for warranty and 9% of your billable time is warranty. What if your planned maintenance rate is $55.00 and a PM takes one hour and a half with no time and travel charged and accounts for 14% of your billable time. Now what is your true labor rate?

Your customer labor rate is $98.50 but your true labor rate or a mix of all your forms of labor performed, is $70.68. Now do you still feel comfortable that your supposedly posted labor rate is $98.50?

Internal labor rates are the charge-out rates at which work is done for the sales, used and rental departments. It is sometimes also used as your rate for lease with maintenance. internal labor rates distort the profitability of the service department and are often done to make the profitability of other departments “look good”. We refer to internal labor rate (and yes, internal part rates) as little more than a “sales person’s discount.”0 Internal labor rates as we have shown can be devastating to your shop profitability

Internal labor rates also have a tendency to play havoc with the measurement of your shop efficiency and productivity. If business slows down, watch how the technicians “slow down” on internal work. Internal parts & service pricing also destroys the profit center concept of the dealership. If your dealership is seeking a higher absorption rate, then all internal pricing needs to be eliminated.

You have now developed your dealership’s true labor rate, or the true dollar amount recovered from producing an hour of labor within your dealership. The other figure you need to calculate is what is your dealership’s cost for producing this hour of labor? Once you have calculated this cost you can quickly develop your service department’s “break-even point”. Assume for the minute that your shop’s break-even point is: $74.28. Since your true labor rate per hour is $70.68 and your shop break-even point is $74.28 you must increase your true labor rate by $3.60 just to break even. Looking at the glass being half empty you are losing $3.60 an hour for every hour you bill at your current true labor rate.

Hopefully you are in business to make a profit. Next, determine what service gross profit you desire to earn in 2013 (guidelines run between 60% and 65%) and mark up your true labor rate to the profit level you desire and establish that as your true labor rate.

If you would like to receive an emailed copy of the formula for figuring your dealership’s labor rate then email us at [email protected] and we will email you, “free of charge,” a 15-page document detailing how to develop a profitable service labor rate.

Why not take the time now to review your service department’s labor pricing policy? 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 $5, $7, $9 or even $11 dollar increase in your true labor rate. You are absolutely guaranteed to find your shop a “whole lot” more profitable in 2013!

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 cannot do it again for another year. Recognize however that this manufacturer limitation is for warranty purpose only. No one can tell you what you can charge or what you cannot charge, it is your decision!

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!

John R. Walker is president of After Market Services Consulting Co. Inc. E-mail [email protected] to contact John.

 

Author: John Walker

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