Dealership Service Focus: Am I Charging Enough?
Unveiling Your Dealership's True Labor Rate and Its Impact on Profitability and Customer Loyalty
The standard thinking in the dealership industry is to just raise our labor rates to improve profitability.
Let’s make sure we understand that it’s not the “stated, posted, door rate” that matters the most. The most important number is your Effective Labor Rate (ELR).
ELR is defined as total labor sales divided by total labor hours. For this example, let’s just refer to Customer Labor Sales (we’ll address internal and warranty later in the newsletter).
As I’m sure you know, even though your “stated rate” may be $200, your Customer ELR (CELR) will be substantially lower based on how much you discount, promotional pricing, underbilling, etc. So, your CELR may actually be closer to $150.
The Warranty Rate Dilemma: Boosting WELR vs. Customer Retention
Most Service Departments that perform warranty work are keenly aware that their Warranty ELR is determined by most state laws that require that the manufacturers reimburse dealers based on their CELR less competitive and maintenance items. Therefore, many service departments crank up their retail rates to maximize their warranty reimbursement rates.
Be very careful about this, though! We all want to maximize our profitability but if you price your retail repair rates too high then, yes, assuming you apply for warranty labor rate increases on a regular basis, you will increase your Warranty ELR (WELR) but you will also be in danger of negatively impacting two very important key performance indicators (KPIs): customer retention and vehicle resale rates.
Why High Rates Drive Customers Away
Surveys say that around 60-70% of dealership customers defect after the warranty period expires as our retail/repair rates are normally substantially higher than the independent repair facilities. There is a balance that you need to achieve between door rates and customer retention/vehicle resale rates.
Competitive Rates and Lower Costs
Often, the mindset is to continually increase CELR to achieve 70-75% labor gross profit percentage and, then the WELR. The more effective and balanced method is to offer a competitive CELR and lower the cost per flat rate hour. (We are publishing an article about this next month.)
Remember that customer retention and vehicle resale rates are critical. Let’s not just churn through customers. Let’s retain those customers when they come out of their warranty period and provide them with fair yet profitable repair rates.
Questions?
Dealership Retail & Consulting
A Brady Ware consulting partner, Brett has over 40 years of retail dealership and consulting experience in all areas of dealership operations including fixed and variable operations.