Finding and Keeping Hidden Net Profits in a New Car Dealership Service Department

July 29, 2008

By Ray Branch, President and CEO, The KEEPS Corporation

Managing a new car Service Department while producing a 20% Net to Gross Profit ratio is not a simple task. This article will outline one (of about 14) key ingredients that must be in place to truly maximize net profits.

1. Customer Pay Effective Labor Rate Daily Management

First, let’s cover the basics. The Effective Labor Rate (ELR) is defined as “Labor sales dollars collected from the customer divided by the flat rate hours (not clock hours) paid to the technician to get the work/repair done.”

In many service departments around the country it is common to find the customer pay effective labor rate below the stated/door rate by $9.00 to $16.00 and in many cases $20.00 or more below!

The main causes are:

Service consultants discounting labor dollars to compensate for incorrect repair estimates.
Technicians lobbying/negotiating with new or low skilled service consultants for more flat rate time AFTER the customer repair estimate has been presented and agreed upon by the customer.
Service consultants letting customers redeem expired discount coupons that reduce labor dollars by 10 to 15 percent.
Service managers feeling the market pricing pressures from the nearby service providers, therefore discounting labor dollars without adjusting flat rate hours paid to the technicians.
NO effective labor rate monitoring or control system in place for improving ELR.

If , in the course of doing business with a new car dealership, we were to ask the dealer, office manager or service manager, “What is your current customer pay effective labor rate?” You will get somewhere between a “deer in the headlights” look to “It is exactly $72.82 this month.” A lot of service managers can tell you what the number is, but 95 percent of the time NO ONE can tell you what the formula is or how to manage or improve ELR by $9.50 (or more) over the next 30 days.

Effective Labor Rate is one of the most powerful yet allusive business management equations in the service department today.

How to Improve Effective Labor Rate

Move service department pricing and estimating into the 21^st Century by NOT quoting flat rate hours, labor dollars, and parts dollars to repair the car.
Instead switch to “One Price Selling” by giving the customer a total of parts and labor to do the service/repair.
Install several ELR improvement systems in the service department.
A multi level labor pricing system that will charge a small amount of labor dollars more without adding more technician flat rate hours to the service/repair price.
Monitor the Dealer Management System Exceptions Report for discounting by each service consultant.
Meet one-on-one with worst service consultant offender (with repair order examples) showing labor discounts.
Adjust flat rate time on highly discounted service work to off set the labor discounts.
Add $1.50 to $2.50 to several highly discounted services and see what a big jump in ELR you get.

I have only touched the surface of this very complex ELR net profit loss issue. To see the detrimental effect of Low ELR use the following formula for one of your new car dealer accounts.

# of Customer Pay Flat Rate Hours (average

month)

x Difference between last full month ELR and

Current Stated/Door Rate

= “Left-On-The-Table” dollars for one month

x Months in one year

= LOTT Net Profit Dollars for one year

x How many years has this problem existed in

their service department

= You are now getting the picture for the

severity of this problem

If you are scratching your head after reading this brief article, I would consider it a privilege to talk to you at length about how the KEEPS Corporation can help you find and keep a TON of hidden net profits. You can reach me at 1-800-948-9377. Our web site www.keepscorp.com also offers free tools to help Find and Keep Hidden Net Profits in your Service Department.

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