Variable labor rates are a topic that seem to generate lots of head nods during our 20 Group meetings, but they often do not end up being translated into daily operations right away. We feel there is always a compelling argument for implementing a variable pricing strategy, so it is surprising that more service managers do not embrace it enthusiastically. The discussion usually focuses on the fact that you are raising prices in an already tight market, but this should not be the only action taken. In fact, variable labor rates often lead to a decreased price in the most competitive (and the most shopped) areas. Your service department should be striving to generate traffic with competitive pricing, build raving fans out of your customers with superior service, and making money by uncovering additional opportunities and getting the chance to perform high-end labor. There are plenty of stores that do all three at the same time, and it is interesting to watch how all three of these factors work together.
The key to successfully integrating variable labor pricing into your service department is to segment your working mix. There are three general types of labor: competitive (oil changes, brakes, etc.), maintenance (specific to your maintenance schedule), and repair (diagnostic, electrical, heavy-duty, diesel, etc.).
*You can combine competitive and maintenance into one category for the purposes of this article.
Competitive and even maintenance labor can be found at any number of service stations in your market. While you can distinguish yourself by the customer’s overall experience when they visit your dealership, studies overwhelmingly show that customers see little difference in these categories between the dealership and other repair shops. These labor categories should be priced very competitively in the market to drive traffic; unless you REALLY pamper a customer, which very few dealerships do well, you cannot distinguish yourself enough to justify a higher price.
Repair labor, on the other hand, is very different in the customer’s mind and the market’s reality. This is labor that few independent service centers will even attempt; the only real competitors in this type of work are other dealerships in your area. Too often we hear about managers who are scared to quote an hourly rate that is significantly higher than the market rate. This, of course, is ridiculous since the market rate has little bearing on repair work. Moreover, if a customer asks for your hourly rate (you aren’t actively sharing this information with the customer, right?), you should give a range between your lowest and highest rates. Nobody charges $95.00 per hour for an oil change, so why would you want the customer thinking that you do? This will emphasize the competitive rates that you have and, if necessary, offer you the opportunity to explain why you have a high-end rate.
Selling your high-end rate should be easy, and you would be amazed at how much a customer appreciates your transparency if the following are explained properly:
- Repair work can only be done by fully licensed and trained technicians. This means that there has been considerable time and money spent to train these individuals, and there will be more in the future. This is one of your biggest selling points and should not be understated. To say that you should charge the same for an expert as you charge for an apprentice is ludicrous!
- The investment in proper equipment and tools is probably far higher than a customer would expect. Vehicles are becoming more and more complex, so there will be many more investments to come.
- Most repair work comes with some kind of warranty, whether to insure the parts or secure the dealership’s commitment to the customer. Independent shops will usually pass this work on to the dealership because they know that there can be headaches down the road.
An amazing thing starts to happen once you begin to sell your labor in this way. You make it much more difficult for a service advisor or a technician to justify a discount. There should be a reason why you charge what you do, and it is not totally based on how cheap the competition is. When you can confidently back your pricing, everyone in your dealership will believe in the value that they provide to their customers. Remember, the service department is just a different kind of sales department. You need to build value and sell benefits, not just price!