Equipment dealers all across North America are complaining about the effect increasing fuel costs are having upon the profitability of their dealerships. So what are the successful dealers doing about it? They are doing the same thing all successful retailers are doing: passing cost increases along to the consumer. Do you think for one minute that grocery stores chains are not adding on their increased freight costs to the price of food they sell?
For years too many equipment dealers have hesitated to add on “time and travel” for either scheduled or unscheduled service maintenance done in the field. Add to this the fact that most manufacturers still refuse to allow dealers to bill them (the manufacturer) “time and travel” for warranty. This is warranty that was caused by someone’s neglect or carelessness back at the factory where the product was produced. If the manufacturer is not going to pay this cost, then the customer unfortunately must bear the cost!
How many dealers have adjusted labor rates over the past 18 months to offset your increase in freight and fuel cost increases?
For that matter, check out the following list of specific items that have a dramatic effect upon your cost of labor, and let us know if you have seen any of these costs go down in the past 18 months. If you do not check out this list at least every six months and adjust your labor rate accordingly, then you have a serious hemorrhaging of profitability.
Take a long, hard look at some of the costs involved in operating your shop. Some of these costs dealers neglect to review on a timely basis—and they are increasing yearly while labor rates remain stagnant. Technician wages are 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, paid overtime, service manager’s compensation, occupancy expense, utilities, interest, liability insurance, service training, service vehicles, shop supplies and tools, office supplies and many more common items which are increasing in cost on a regular basis. If these costs are going up, shouldn’t dealers increase labor rates as their cost of sale increases?
Over the past years we have quite possibly written more articles on the need to increase dealer labor rates than any other area of dealer management. To date we have emailed dealers 7,548 of our formulas for developing a profitable labor rate, and we will continue to do so. Email us at amsconco@aol.com and your copy will be on its way free of charge.
We have consistently asked manufacturers what right they have to “dictate” to dealers a set labor rate for national accounts, special accounts or accounts to whom the dealer did not sell the equipment. The established labor rates set by the manufacturer in these instances is generally half of what the dealer is currently charging. It is and has been illegal to do this since 1937 under the Robinson Patman Act. Manufacturers are doing this simply to increase their sale of equipment at the dealer’s expense. Let your trade associations know of this.
Usually equipment dealers gauge their shop labor rate in competitive terms as to how much other dealers are charging in a given area. This practice is “fostered” by the manufacturers who often require the dealer to check out and submit to the manufacturer three or four local competitor’s rates for establishing an “approved” labor rate for the dealer’s warranty. Manufacturers also tell their dealers they can only increase their labor rates (for warranty) once a year, all this despite the fact that the dealer’s freight and fuel costs have increased monthly over the past year.
Ask 10 of your top customers what your labor rate is and chances are they won’t know. 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.”
Customers want good service response time for both scheduled and un-scheduled downtime. If your dealership truly markets these two points to the customer, then there is no questioning what your labor rate is, the customer will want you to service their equipment. It is all a matter of marketing your service department in the same way you market your sales department.
A look at Industry Cost of Doing Business Studies indicates that equipment dealers lose a tremendous amount of money every year in their service departments. This is unfortunate and unnecessary, and dealer survival in these hard times will require putting a stop to shop losses.
Equipment today is becoming more and more sophisticated. According to most dealers, finding qualified technicians to work on this equipment is becoming an almost impossible task. How much more must we charge to enable the dealership to hire, train and retain excellent technicians? Therefore, your shop rate probably has more relevance to your cost of labor than it does to your retail competition.
Check the labor rates you’re paying to have office equipment (copy machine, computer, etc.) serviced. Ask yourself how these people can charge the rates they do to service this type of equipment out of a briefcase. Ask yourself why you cannot charge a higher rate for servicing a $3,000 to $10,000+ piece of equipment with all types of computerized controls and electronic gadgets.
How do you establish your labor rates? Ask a dealer why he sets his labor rate where he does and he will tell you that competition determines his labor rate. What market research has been done on the competition? If your labor rate is $80 and the “shade tree” mechanic is offering $40, then he is half your labor rate, and you cannot compete at the higher rate. But what if the “shade tree” technician took three hours to do a job when your dealership could do the same job in one hour? But what if the “shade tree” technician did a great job servicing older equipment but knew absolutely nothing about new equipment? But what if the “shade tree” technician did not have the special tools or training to do the job? But what if the “shade tree” technician failed to guarantee his work? Answer these questions and more before you say you cannot compete against those “others” for your service business.
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 are little more than a salesperson’s discount, but they can be devastating to your shop.
Internal labor rates also have a tendency to play havoc with measurement of shop efficiency, productivity and profitability and destroy the profit center concept of the dealership. These are all good reasons why internal pricing needs to be eliminated.
Hourly vs. Standard Labor Rates: Many successful equipment dealers have developed standard rate (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.
Equipment dealers too often argue that standard rating is too difficult to institute because of the variety of equipment that they service and the conditions under which the equipment operates. Yet manufacturers develop standard rates for warranty. While dealers and service managers may argue these rates are unrealistic, they can be used as a guideline. If you believe a manufacturer’s standard rates are off by 15% to 20%, then adjust your own standard rate program accordingly.
The advantages to developing flat-rate labor pricing include: profit can be increased by reducing job times; invoice disagreements can be eliminated; technicians can be given specific goals to meet; the program can be used as the basis for a technician’s incentive compensation program; many customers prefer to know the cost before work begins on their equipment; and technician efficiency and productivity can be easily measured at the time the job is completed.
Standard rate labor pricing allows sales reps to more reliably quote prices 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.
Many of your manufacturers lock dealers in to a once a year increase in 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.
Why not take the time now to review your labor pricing? Have the guts to raise your rates a “couple of bucks.” Review last year’s labor sales and re-figure them with an additional three, four or even five dollar increase in labor rate. You are guaranteed to find more profitability!
Your service department is there for one purpose and that is to produce a profit for the dealership. It is your business: Have the guts to charge a fair price for the quality service your shop performs.
John Walker is President of Aftermarket Services Consulting Co., Inc., a Fort Mill, SC-based international training and consulting company working with manufacturers, dealers and associations in parts and service marketing, managing and merchandising techniques. For more information contact AMS, 817 Stockbridge Drive, #399, Fort Mill, SC 29708; e-mail: amsconco@aol.com; visit amsconco.com.
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