The “successful” pricing of labor and parts is as mysterious as the reasoning behind the stupid jacked-up buttons on the ineptly named “Smart” key, which keeps opening the trunk and windows from the pocket every time a driver sits down in a nearby office (Can you tell my car has one?).
Right off the bat there’s grid pricing (Chilton used to supply the manual version with a flat rate manual in the 60s), which typically depresses the labor rate when lesser flat rate hours are billed. This then escalates the rate as the hours build before tumbling the rate downward in the much higher range. Conversely, parts billed on the same repair order are priced exactly the opposite. When the omnipresent “parts matrix” is applied, parts markups are far higher (like a mile dude) on lower priced parts and diminished to MSRP as the price of the part escalates. Completely opposite pricing strategies – it’s no wonder parts and service people don’t get along.
Then there’s the locked up competitive parts pricing banished to a separate source so the pricing tape doesn’t slap it around each month. These parts become victimized by ignorance as parts costs escalate and original GP margins begin to collapse over time. Related labor is usually locked up too in the competitive arena, except for the ongoing gross-profit-margin-killing discounting from never-ending mailers, often sent to keep particular individuals happy rather than to generate an actual profit, or an ongoing customer.
Even more pricing mischief occurs in the shops where the techs, who constantly whine about “high” parts prices, get to call the pricing shots on labor. These are easy to spot on an RO survey because every labor price ends with .0, and it usually has a least a “3” in front of that.
Let’s not forget the ubiquitous customer-retention-killing “diagnostic” fee, understood by the customer as the dubious cost for “having a tech look at it” or other words of useless value. This fee practically guarantees the elimination of a customer visit when it’s quoted on an incoming phone inquiry, while the independent shop guy spouts “Hell, bring it down and let me look at it – no charge partner.”
So what is the right approach to successful pricing – the one that doesn’t drive customers away, but still allows for profitable gross profit margins?
Regarding parts, the issue is more related to the purchase price of the part in the first place on highly competitive items – the cost of goods – keeping in mind that profit is pretty much essential to you know … survival. When high quality oil filters (OE or better) are available for as little as $1.80 to competitors, the dealer is at a distinct disadvantage when the parts manager has to pay $4 for the same one. Often brake pads also fall into the same abyss. Successful pricing is as related to the purchase price as it is to the selling price – amazing huh?
The good news for dealers is that more and more savvy manufacturer leaders are recognizing that trying to make significant profit from dealers on a high volume item like oil filters, ultimately creates a loss when customers bail over the pricing of something as identifiable as this ornament. Until then, for some franchises, maybe a secondary source is needed to get real.
Labor costs are another issue. At a recent workshop I was conducting, no dealer manager could tell me what percent of maintenance-related (competitive) items the shop was performing. Everyone admitted that lower priced maintenance items were being dispatched to high paid techs, sinking the margins to practically nothing on the large-volume basic service package.
Maybe it’s past time to consider an old-time approach to tech pay, where the tech rates vary based on the work type being performed. This has been done before, in fact, way back in the 1960’s. Today that might be something like $25 per FRH for diagnostic time and $15 for maintenance time. That certainly would make maintenance less attractive to the shop bully – (you know you have one.)
I was doing some research on pricing techniques and ran across an interesting study from England. A company was selling lesser priced beer without much gross profit, so they decided to produce a higher priced one to gain more gross (sound familiar?). Well, they were marginally successful with that approach. A hired research firm suggested that they produce an even higher priced premium beer to help the bottom line. They did and it worked very well, but not as they planned.
What occurred was a huge increase in the middle-priced beer sales after the customer was given a choice of three price ranges, rather than just two. More research on this subject landed on similar results when three price levels of clothes racks were featured, rather than just two. These and others I fell upon certainly give validity to the good – better – best pricing strategy as applied to customer-retaining maintenance packages.
OK, I am running out of editorial jabber space , so I will end with an offer. If you need an Excel spreadsheet to make a study of your tech staffing versus your workmix, just send a request to firstname.lastname@example.org and put on the subject line: Workmix vs. Staffing – Fat City – I love it when you are clever. I’ll pass it along speedily my friend.