October 23, 2017

MBAF's Juan C. Pena discusses variety of new strategies used by fixed ops managers to achieve their profit goals in the Automotive News.

Like fixed operations managers everywhere, Doug Shipp wanted to improve the gross profit from his service department’s labor.

Shipp, service and parts director at Tafel Motor Co., a Mercedes-Benz dealership in Louisville, Ky., reviewed the rate his shop charged for customer-pay work: $130 an hour for each repair job, no matter how complex.

That single rate no longer made sense. So in January, Shipp started charging $140 an hour for nonmaintenance repairs, such as suspension work.

A month later, he created a top rate of $150 an hour for highly skilled jobs, such as heavy engine work. He kept the $130 rate for routine maintenance.

The result? “The tiered rate has helped me absorb my discounts” on such items as customer oil changes, Shipp says, “and still maintain my high level of gross profits.”

Market research

The cost of labor is a key part — some say the most important element — of the equation that enables a dealership to cover most or all of its fixed expenses through service department income, commonly called service absorption. Fixed ops managers use a variety of new strategies to achieve their profit goals.

Rate setters

Dealership service departments’ labor-rate terms

  • Customer-pay: The undiscounted rate a dealership charges ?customers
  • Internal: The rate dealerships charge themselves to recondition used vehicles for sale — usually the same as the customer-pay rate
  • Warranty: The rate an automaker pays a dealership to make warranty-related repairs
  • Flat: A set rate that a dealership pays a technician for each type of service job
  • Effective-labor: The amount a shop makes per billed hour, calculated by dividing total labor sales by hours worked

“The only thing you have to sell in the service department is labor,” says Jeff Bakich, a dealership management consultant and NADA 20 Group moderator.

Labor in the service lane creates its own profit center and is accounted for separately from parts sales. The NADA Academy, which offers dealer training, recommends that the standard rate for retail gross profit from labor sales should be 73 percent.

That is, if a dealership charges a customer $100 for labor, $27 of that should go to the service technician as wages, leaving $73 as gross profit.

If a dealership isn’t hitting that profit target, it is likely charging customers too little for labor, Bakich told Fixed Ops Journal. He advises dealers to survey their competitors’ service labor rates every six months.

“Always know what local dealers are charging, so you are earning the market average,” Bakich says. “You just call everybody and ask what their rates are.

“It is almost a guarantee that if you haven’t raised your labor rates in six to eight months, you are going to need to bump them up a dollar or two,” he adds.

At Tafel Motor Co., Shipp says, gross profits on customer-pay service work amount to 80 percent of total labor sales.

Service departments have three categories of labor: customer-pay work, warranty-related repairs and internal work for such things as reconditioning of used vehicles before sale.

Overall, Shipp says, every dollar of service labor revenue earned by his shop includes 83 cents of gross profit.

Because his market has no competing Mercedes stores, Shipp says he benchmarks the labor rates of other local luxury dealerships, such as those that sell Audi, Porsche and Jaguar Land Rover vehicles.

His new three-tiered service rates haven’t hurt customer satisfaction, Shipp says, because price is not his main competitive advantage.

“The actual cost of the labor is secondary to the perceived value for the work done,” he says. “Customers attach a value to overall experience. We have to deliver a premium experience that is reflected in the overall costs.”

Tech mix

Jeff Earnest, service director at Royal Nissan in Baton Rouge, La., says he charges $125 an hour for customer-pay work.

His service department’s gross profit from all labor sales is about 75 percent, Earnest says. Its rate for customer-pay work is 75 percent, for warranty work about 80 percent and for internal work about 73 percent.

Having the right mix of service techs helps him meet his gross profit goals, Earnest says.

“I used to have a lot of senior techs and trainees,” Earnest says. “Now I have a lot of express lane techs and fewer senior techs.”

He pays his express techs $10 to $15 an hour, while senior techs make $20 to $26 an hour, he adds.

About 65 percent of the work his techs do is performed in the express service lane, Earnest says, and half of his 16 techs work there. He uses the assignment as training.

“Seventy-five percent of my techs started as express [techs] and have moved up the ladder to become A-level techs,” Earnest says. “Two have turned into master techs.”

Dissenting view

Not all industry analysts see the 73 percent gross profit guideline as ideal.

“If I try to chase the 73 percent, all I will be obsessed with is getting to that number,” says Lee Harkins, CEO of dealer consultant M5 Management Services Inc. in Pelham, Ala. He proposes that service departments focus instead on keeping customers.

“Your gross profit percentage needs to be high enough to pay the bills,” Harkins says. “Do you want to be high gross, or low gross-high volume?

“I may decide I want to go after customer retention” and match what nondealership competitors, such as independent repair shops, are charging, he says.

Erik Day is CFO and partner at Warren Henry Automotive Group in Miami, which operates seven dealerships. He says he uses the 73 percent profit figure as a benchmark, but says he is more concerned with “filling the shop with work.”

Through May, the group reported 2017 gross profit rates for service labor of 79 percent for customer-pay work, 85 percent for warranty work, 78 percent for internal work and 82 percent for all work.

Day cites the diagnostic skills of the dealerships’ service advisers as a way to keep shop customers happy and gross profits high.

“The more accurately a problem is identified, the more efficient the shop will be at fixing the problem,” Day says. “The right fix the first time is a huge metric.”

Advisers’ buy-in

A service department’s pay plan should offer incentives to employees to boost service lane sales, says Juan Pena, a certified public accountant and director in the automotive dealerships group at MBAF, an accounting and advisory firm with headquarters in Miami.

A service adviser should be eligible for bonus pay based on labor sales volume, with minimum requirements for gross profit and customer satisfaction scores, Pena says. He recommends paying advisers 5 percent of gross profit per repair order, and adding pay incentives as they meet increasing volume targets.

Pena says, “I would pay [advisers] on every repair order they write, whether customer-pay, warranty or internal.”

Click here to read that article on the Automotive News.