Many years ago, I helped engineer a program with a major manufacturer called “Dare to Compare,” where the dealer (or contracted firm) conducted a thorough maintenance-pricing survey of the local area, then posted the results on a large poster in the service reception area. Over time there have been many versions of pricing surveys and related posting programs by manufacturers and individual dealers, which served to inform both customers and employees (yes, them too) that the pricing for services meets the competition. Of course, if one is posting pricing for all to see, it forces one to be realistic about the results. That obviously was the ultimate goal.
Still today, customers typically respond to retention questionnaires with the same attitude that dealer service is significantly more expensive than aftermarket service. While there are many influences which would cause new and used vehicle consumers to purchase service somewhere other than their original dealership, such as an awkward location, common thinking would conclude that pricing perceptions would be one of the main factors. All we need to do is work in service reception for a morning to receive at least one or two black eyes over pricing – sometimes it’s actually embarrassing.
Margin Makers
It’s sad to say this, but I have had tenured service personnel tell me they don’t quote certain repair or maintenance items because the pricing is so high they know they will be turned down. “I wouldn’t pay that price myself” they have expressed to me. How pathetic is that statement? I have also had many technicians complain about pricing, particularly parts, and they often blame so-called inflated part pricing for items not being purchased. Lost in these realities is that a typical independent shop makes a much larger parts gross profit margin than dealer parts departments do. While independents lavish in the 50 to 60% margin range, most dealer parts departments are struggling to maintain 38 to 40% on customer pay, the so-called factory margin as published – sort of.
Of course what one has to pay for a part ultimately affects the final margin. It’s difficult to mark up a $5.50 cost oil filter competitively when the shop down the street is purchasing the same factory-spec oil filter for $2. And this is just the tip of this excessive-cost iceberg. Fortunately, wise manufacturer personnel woke up to this situation a few years ago and they conceived a second tier (whatever this really is) of parts at lessor pricing to the dealer. While this has helped with margins in some highly competitive areas (brakes for example), the aftermarket still kicks the backend of franchised parts pricing out of the park on too many common items. Of course, in some cases, if the dealer buys a ton of something, the price gets more palatable.
Parts Smarts
Well, there’s always the claim that factory parts are somehow better than aftermarket parts. That goes both ways since many (most) of the factory parts are made by the aftermarket and are often improved after the first runs display design flaws after use. Yes, most factory specs produce acceptable results (OK, not the plethora of recalls), and dealer purchasing from the parent only makes perfect sense so that all prosper. On the other hand, if disproportionate cost pricing to dealers on highly competitive items is driving customers away, who’s winning on that deal?
But, let’s get to the heart of this discussion and that is pricing items, mostly maintenance, which dealer competition readily steals and keeps – darn them. When is the last time you shopped the local market to see what your customers are discovering regarding pricing? According to a fresh study by U.S. Bank, 41% of Americans say they use a budget – up from a Gallup poll in 2013 that put the percentage at 32% – or one in three households. Consequently, the majority of people are still using seat-of-the-pants budgeting, which translates to where they can spend the least amount of dough to get something done, including car servicing. Ask any experienced service playwright about the times a customer has whipped out their cell phone and looked up a price to challenge a quote. Look, who wants to pay more for what is perceived to be the exact same thing? Not enough service customers are that loyal, at least in the middle class of incomes.
Price Posting
Since “right” pricing isn’t rocket science, and there is no need to be the cheapest on the block, a number of simple steps would be smart business. First, identify (from the DMS) which items are most commonly purchased. It’s likely you know them anyway. These are the key operations to test locally, keeping in mind that the customer is most interested in the final price, not so much what each part or labor costs them. From this survey, figure to price around the average, not high, not dirt cheap – think fair. Would you be comfortable posting everyone’s pricing on the wall, including yours right now? And perhaps you should consider doing that. Establishing pricing on easily defined and competitive items is less about your cost of parts and labor, and all about the readily available market to everyone.
Secondly, examine the cost of the included parts in each operation. In some cases, the parts acquisition cost will be quite excessive, but you might be stuck with it due to your manufacture’s do-it-or-else loyalty program. Keep in mind that most do allow some wiggle room, which may be enough to reach elsewhere for that particular purchase. And don’t forget to factor in the sweet back money for the loyalty.
Appropriate tech flat-rate time is another factor. A perfect example is the purchase of modern alignment equipment which allows alignments to be done lickety-split, while the flat rate was set when we were using strings. This being a competitive item, it requires a competitive price so excessive paid time devastates the effective labor rate, while a very expensive piece of equipment essentially wastes very valuable stall space costing some $10K a month in shared expense. This stall is a financial bummer at best anyway.
Game Shame
The bottom line is that the margins won’t be abundant on competitive items; however, keeping a customer returning is the smarter financial goal overall. And getting creative with labor and parts matrixes on non-competitive items should make up the difference. Unfortunately, we don’t establish the ever-changing pricing playing field, but we can play the game effectively by taking time to study and create the right pricing strategies. Too often this important game is being played around us and we aren’t participating.
Don’t miss Ed Kovalchick’s upcoming session at DD26 Orlando, “Service Department Health: Developing a Consistency Culture in Process Execution, Financial Targeting, Source Document Prep, & Employee Discipline“. Gain the management actions necessary to build a consistency culture, which drives continued growth in dealer service operations.
