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New Year, New Labor Rates – Small changes with big impact to your dealership’s bottom line.

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By Marilou Vroman, CPA, CFE

January is traditionally a month of new beginnings.  New diets, new goals; a fresh start to do things better than we did in the year before.  Now is the perfect time to look at your dealership’s financial health and see what changes you can make today to outperform the prior year.   The service department, with its traditionally high volume and high profit margins, is one of the best areas to take a closer look at how to drive more revenues straight to your bottom line, and one of the greatest opportunities is within your hourly labor rates. Here are a few changes you can make now to start the new year with stronger results:

  • Customer Pay Labor Rates – When was the last time your service manager checked your competing dealers’ customer pay labor rates? Is your rate leaving money on the table? Or are you losing customer retention on competitive repairs due to migration to independent repair shops?  Your service manager should remain aware of market changes to remain competitive on oil changes, tire installation, and alignments, to keep customers in house, and pave the way for relationship building and when it comes time for major repairs at full retail, your shop will be the customers preferred choice.   Labor pricing for major or specialized repairs should be maximized to what the market is willing to pay for your dealership’s quality and level of service.
  • Warranty Labor Rates – When evaluating whether to raise your customer pay rates, keep in mind that increases in your warranty labor rate will often be evaluated by the manufacturer based upon your historic customer pay rates. Your door rate may be posted at $150 per hour, but if you are effectively selling at $125 per hour, this will be the rate your factory rate increase will likely be based on.  This means understanding and analyzing your effective labor rate (labor sales divided by sold hours) to be sure this rate is maximized before requesting your next warranty labor rate increase.  Consider how and when your advisors or bookers record labor discounts on repair orders to ensure the effective labor rate on each RO is maximized.  We see some dealers reduce the labor rate to show a discount when instead it could be charged at full retail per hour sold and the discount instead, charged to cost of sale, advertising, or policy/goodwill.
  • Internal Labor Rates – Interestingly, we often find dealers with low internal rates to ease margin pressure on the pre-owned inventory reconditioning costs. Pre-owned managers naturally prefer this approach; however, we have found dealerships with best practices have internal labor rates set at customer pay rates.  The pre-owned department can be one of the service department’s largest customers and could argue that the same work could be done elsewhere at less cost. However, knowingly sending revenue to third parties does little to strengthen the dealership as a whole, with profits on sublet work, marginal at best, and the risk of lost quality and control over the work.  If a third party is more qualified to do certain work, this would be acceptable, but this scenario should be the exception.  The majority of reconditioning should remain in-house when the shop has the capacity.  The shop will be more likely to prioritize and accelerate work on pre-owned inventory to get front-line ready when the repair is as profitable as customer pay.  The reconditioning costs should largely be recovered through the sale of the vehicle to the end consumer.

Time for a fresh look at your service department and the opportunities which exist in your existing labor rates.  If it has been a while since you’ve made a change, take the time to evaluate your labor rates for your different types of customers.  Small changes to these rates can make a big difference to your bottom line.  The new year is often the time we strive to become healthier.  When it comes to your dealership’s labor rates, this is no place for a diet.

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