With the ever-increasing pressure on vehicle sales margins in today's automotive market, your fixed operations are being counted on more than ever to deliver to the dealership's bottom line. The purpose of this article is to help you with the math behind setting target rates for labor sales. There are different target rates for each different type of labor sale and different target rates inside of customer pay labor, depending on whether it is maintenance or repair.
ELR and Target Rates
At a recent 20 Group meeting, one of the members asked the group to help him identify his biggest opportunity in his service department. Together, the group evaluated his numbers, comparing them to NCM's Benchmark data and the group average. After reviewing his service department in the composite, the group concluded that he should focus on his customer pay labor sales and gross profit margin.
The member had 67% gross profit for customer pay labor sales, while the average for the group was 70% and the Benchmark for his particular franchise was 73%. The conversation turned to his effective labor rate (ELR) and cost of technicians. The group decided to focus on his ELR as it was $85.02 for customer pay labor sales. If you need to find this number, it is located in your DMS under the service management reports. The member knew he wanted a new quantifiable goal. What does his new CP effective labor rate need to be to get to group average in gross profit? What is his target?
How to Determine a New Target Rate
This example assumes that the cost of labor remains constant:
ELR (Effective Labor Rate) x (1- current CP Gross % of Sales) = Avg Cost per Labor Hour
Avg Cost per Labor Hour divided by (1- % desired) = Target Rate
To apply to this member's case, we took the $85.02 ELR and 67% CP gross on sales:
$85.02 x (1-.67) = $28.05 (Avg Cost per Labor Hour)
$28.05 / (1- .70) = $93.52 (New Target Rate)
Setting a goal is the first step in achieving it, and knowing that it is based on what your peers are accomplishing gives you a realistic place to start. The member in our example above left the meeting knowing what his target was, and enrolled his service manager in NCMi courses to learn proven best practices, and is considering an NCM Service Managers 20 Group as well. If you are looking for help reaching your goals, we would be happy to chat with you!