The Service Pricing Challenge

Transcription

1 The Service Pricing Challenge When it comes to repair shop pricing dealers get a bad rap. They have been painted as overpriced cheats by the aftermarket and writers who have an axe to grind for so many years that the perception seems ingrained in the public psyche. But are they really and why does that perception persist? Much has to do with the complex array of services that range from the basics to the brain numbingly complicated. Add to that mix customers who may be less than knowledgeable, inadequate explanations on their invoices and from their service consultants and you have a recipe for confusion. All these things conspire to perpetuate the pricing myth. So what s a dealer or manager to do? On January 21, 2016 Les Silver, Partner of The KEEPS Corporation joined us for an online workshop to share his thoughts on using service pricing to leverage market and retention competitiveness. Les Silver founded Newgen Results Corporation, MPI, and Service Repair Solutions. Dating back to the early 1980 s, Mr. Silver has pioneered almost every aspect of automotive service technology. Two of his sons started in the industry a decade ago while working for SRS (parent company to MPI, AutoPoint, Identifix, & IATN). Through various sales, product development and managerial roles they learned the lasting belief is that technology must serve to improve processes and generate tangible results. This report is a summary of Les comments and suggestions..see Les Contact Details on the last page. Striking a balance between high and low skilled labor pricing and still making a reasonable profit seems more art than science, and not typically something that managers have the time or skills to pull off. For many dealerships it is a hodge-podge of ideas that may or may not actually work, worked in days past, or simply work good enough. But is good enough really GOOD ENOUGH? Les Silver and Ray Branch have found that significant profit is sacrificed by inadequate price discipline. MKA3 - Silver - The Service Pricing Challenge 2015 DealersEdge All rights reserved. No part of this publication may be used or reproduced in any manner without written permission.

2 Les, Ray and the KEEPS team have a better idea and a better plan and the takeaways from this workshop are: Is the dealership really more expensive or just a misguided customer perception? How to set retail service pricing to maximize both profit and retention. How to research your unique market conditions. How to empower team members to sell with the confidence that they are competitively priced. How to manage your pricing policy with Key Performance Indicators. How to better understand your customer paid business via work mix. How to leverage your competitiveness for service marketing and retention success. To understand how to effectively compete it helps to understand the market that we are competing in. The retail automotive repair market is huge, reporting $250 Billion in sales in 2015 up from $208 Billion in But as the illustration shows, dealer share has dropped from 29.1% to 26.8%. Why did this happen? After all dealers sold 100% of the vehicles that make up the market! The aftermarket understood that it was their job to seal your customers before most dealers understood that it was their job to retain them. This is unfortunate because dealers have the advantage but often fail to leverage the relationship they build when they make the sale. So who is the automotive repair market and where is the $250 Billion being spent? As the illustration shows, sales go many places, but the dominant source is aftermarket repair shops. Breaking down the $108 Billion aftermarket repair shops category highlights who your real competition is 2 MKA3 - Silver - The Service Pricing Challenge

3 with general repair shops (Pep Boys, etc.) topping the list, followed by retailers like WalMart, tire dealers like Firestone, Goodyear, Tire Rack, etc. So how do we get back some of that market? One big way is convert the service pricing challenge into an opportunity. The Role of Price Service pricing plays a critical role in service sales, profitability and retention and to best understand how that role has changed over the years, it is wise to understand how the business has evolved. As the illustration shows, over the past 60 years, the entire landscape has shifted from many dealer rooftops performing a warranty and repair heavy mix to fewer rooftops performing a mix weighted toward maintenance and repair. Since the imports entered relatively late and didn t have a repair base to draw against, they positioned themselves to capture the maintenance and light repair market which continues today. However this is starting to change. As the illustration shows, warranty is about 33% for both domestic and import dealers but maintenance is still the largest chuck for imports as opposed to repairs for domestics. One saving grace has been fewer dealer points splitting up the pie and in some cases limited shop capacity results in maintenance being crowded out by repair work. However capacity limitations may be contributing to market erosion and be the driver of off-site initiatives such as Ford s push for stand-alone remote Quick Lanes. MKA3 - Silver - The Service Pricing Challenge 3

4 This evolving mix presents significant business opportunities but also demands that dealers take a look at their CP component through a different lens. While business has traditionally been segmented into three classifications; CP (customer paid), Warranty and Internal, it is becoming increasingly necessary to break CP down into LOF (Lube, oil and filter), Maintenance and Repair business subsets. Essentially each CP business subset has different rules governing how it will be perceived in the market. For example: LOF: This is significantly discounted, very highly advertised and very highly shopped. Maintenance: These services are discounted depending on market conditions and visibility and represent a pricing profit opportunity. Repair: These are full rate because there is less competition, particularly where heavy diagnostics are involved and represent a significant pricing profit opportunity. Unfortunately CP gross profit and ELR (effective labor rate) metrics are not useful measures to capitalize on these opportunities. For example ELR can fluctuate, not because anyone did anything wrong but because of work mix. Simply put, chasing ELR sends you down a blind alley because work mix hides true performance. As the illustration shows, even though the ELR for each subset, LOF, Maintenance and Repair remained the same, the overall ELR fluctuated based on the relative sales volume for each subset bucket. When setting benchmarks for performance it is helpful to know your market. Les offered an analysis of over $5 Billion CP transactions that the KEEPS team has performed and broken them down by region and dealer type. For example in the South Central region, the average Domestic dealer yielded a 66.5% LOF labor gross and a $ Repair ELR. Naturally, regions cover a lot of area, so you will want to research your particular market. 4 MKA3 - Silver - The Service Pricing Challenge

5 Research by KEEPS has identified two areas where profit is lost at the typical dealership. 1. Lax pricing compliance. 2. Finding the perfect target price. Pricing Compliance It seems that in virtually no other business is the salesperson allowed to dictate the price that the customer pays, but in dealerships it seems to happen all of the time. Maybe the advisor forgot what price to charge or maybe they blew the parts estimate and changed the rate to compensate, who knows? There is a multitude of ways that profit is lost when no one is watching. So how does this get fixed? It starts with using operation codes (opcode) properly. Opcodes can be thought of as the part number of the service department. And just as you would never lump all parts into a generic number, neither should MKA3 - Silver - The Service Pricing Challenge 5

6 repair operations be lumped into a generic labor code. Surprisingly it is not uncommon to find that the most used opcode is something generic like MISC: or General Repair and they are destroyers of meaningful information and easy analysis. Proper opcode utilization is necessary to place line items into their appropriate business (LOF, Maintenance, Repair) bucket so your labor inventory can be properly analyzed and managed. So if this sounds like you, then the first step is to put a stop to this practice. The next step is to conduct an RO analysis and ask these questions. 1. What did I charge? 2. What should I have charged? 3. Unfortunately this can be a bit time consuming since there can be many different labor rates. a. Retail Customer b. Fleet customer c. Extended warranty d. Package service e. Employee f. Authorized discount g. And the list goes on. 4. Was there a difference? 5. When discrepancies are found, counselling the guilty party often solves the problem. KEEPS has determined that dealers lose thousands in profit opportunity each month as a result of non-compliant labor pricing. Sadly this information is not something that most DMS systems are capable of extracting. So what is the perfect price? The perfect price is a retail price that is neither too high nor too low, maximizes your profitability and maintains superior customer retention. So long as your policy does not violate any law, it is purely a commercial market based decision. Sadly there is quite a lot of misperception about what the law does and does not allow in regard to pricing. KEEPS has researched all 50 states and Canadian provinces and offers this summary: Customers must receive and authorize a quote (estimate) that outlines the work to be performed and the amount charged for each item. If a change happens in the course of the work that will increase the estimated price this requires an additional authorization prior to the work being performed. Parts must be specified as OEM/Aftermarket/New/Remanufactured. In most cases hourly labor rates do not need to be posted. 6 MKA3 - Silver - The Service Pricing Challenge

7 In most cases labor and parts prices do not need to be disclosed beyond the total cost for each repair. For example rather than showing as $XXX labor and $XXX parts, only the combined price is required. Les recommends contacting your local Dealer organization for clarification and he noted that KEEPS has the laws for each state available at no charge upon request. However legal is one thing but inappropriate is another and can cost you a customer. Les offered a personal example of how CVS lost him as a customer by not honoring a coupon found on When building a pricing strategy, it is important to determine if that job should be an assembled or menu price. Assembled prices Assembled prices are what they sound like; they are calculated by job and typically have three elements with a number of variables. For example: Labor Hours may be calculated as: a. Straight time. b. Labor time guide (Motors, OEM, etc.) i. Identical jobs can pay different times depending on the guide used. Labor Rate may be calculated as: a. One rate for all jobs. b. Variable rates depending on technician skill. c. Variable by skill and job duration (Matrix/Grid). d. Variable by skill and job duration and customer type. Parts may be calculated as: a. List price. b. Variable based on cost (Matrix/Grid). Assembled prices are used for all repairs and some maintenance items. Because there are so many moving parts there are many opportunities for errors. Menu prices Menu prices are used for all LOFs as well as many maintenance services and common repairs where there is competitive pressure and are easily shopped. 9 9 Menu prices work in reverse starting with the end price in mind and working backwards to arrive at parts and labor prices. 9 9 ELR and gross margins for labor and parts are usually discounted. So how do you create and adjust menu prices? Les offers a plan. MKA3 - Silver - The Service Pricing Challenge 7

8 1. Choose your items. 2. Study your market. 3. Set or adjust your price. Use a price elasticity model for each item to evaluate how much you can raise your price before volume decreases enough to effect margin. Price elasticity is a measure of how sensitive customers are to changes in price. For example increasing the price to from $2 to $329 increased the margin per job by $30 at a loss of 5 potential sales and resulted in a total profit improvement of $1,785. Les offered a copy of the price elasticity spreadsheet at no charge upon request. These adjustments are judgement calls, but help you gain knowledge of your market. As a general rule, there is probably more room than you think. 4. You still need to be competitive in the LOF and Maintenance markets on an apples to apples basis. That does not mean cheapest. It does mean that you need to justify price by emphasizing why you command a higher rate. For example: The best technicians/ tools/ experience = Quality. The best parts = Quality. The best warranties = Quality. The best environment/amenities = Customer experience. Alternate transportation/valet = Customer experience. When arriving at target prices, keep these things in mind. Customer perception is still dealer service is expensive. How well do you know your market? Some things that influence price elasticity are: Franchise. 8 MKA3 - Silver - The Service Pricing Challenge

9 Rural vs. Metro. Types of aftermarket competitors. Density of competition. You never really know until you investigate. When conducting mystery shops in Dubuque IA, KEEPs researchers found that the average dealer charged less for a brake job on a Japanese sedan than their aftermarket competition. This would suggest that those dealers could easily improve their profit picture by raising their price. Les offered this real life example of a manager who did the research on seven items, tested his price elasticity and increased his profit by $43, (note: ISP means Intelligent Service Pricing) Conclusion Les stressed these points for capturing your lost profits: By understanding and managing your CP business as three separate business types you can have the clarity needed to understand and improve ELR, Gross Profit and Retention. By understanding and managing the adherence to your pricing policy on every line item of every repair order you can capture lost profits. By understanding your market you can fine tune your menu pricing to improve your yield. While price plays a role, customer retention goes beyond that one element. Some thought starters for keeping customers are: Do you bother to get to know your customers and what their plans are with their vehicles? Do you follow up and manage their visit pattern to make sure that they don t fall off the maintenance grid? MKA3 - Silver - The Service Pricing Challenge 9