Getting the mix right between retail and warranty labour
Many years ago as a zone service manager I used to tell dealership service managers that they were in control of managing the mix between retail and warranty labour. That meant that if the warranty was running high it was their fault!
Sometimes they would play ball and work with me, other times would tell me that warranty is warranty and they did not agree. So I would put them on prior authorization for all major repairs and watch the warranty dollars fall like a stone. It was interesting to read some NADA statistics recently showing that the average dealership parts and labour brought in more annual revenue than the prior year, whilst creating less money falling to the bottom line.
Sales up and bottom line down, what happened?
Looking into the NADA report broken down by labour mix, for example, customer labour, warranty labour and internal labour, it appears that every category either flatlined or increased with the exception of customer paid labour!
The numbers show that in the U.S. customer paid labour declined by almost $800 million dollars. To sum it up total sales increased by 5.2 per cent while net profit dropped by 2.9 per cent. In real terms the drop in customer paid labour was relatively small, but with a 70 per cent plus gross profit, it had a major impact. To quote Willie Sutton the prolific U.S. bank robber when asked why he robbed the banks he reportedly replied: “Because that is where the money is.”
Internal labour
We have said before that many used car managers have helped to put the service manager’s children through university. But selling more internal labour dollars is at times an unreliable revenue source. If the internal labour increased because of strong used vehicle sales then that might be ok, but if it was from increased reconditioning expense per vehicle then that could be a major concern to the dealership.
Warranty labour
With fewer new vehicles in operation from declining sales and improved quality why did we not see the warranty dollars decline? Could it be because of the factory focus on reducing customer maintenance expense by extending service intervals? And how about the change in technology that now forces flat rate technicians to look for other sources of revenue? If that is the case then it is a very dangerous shift in focus, which could keep the warranty audit teams busy for years to come!
What is happening to customer paid labour?
According to J.D. Power and Associates the average amount per year spent by customers on maintenance and repair is on a steady decline. The average spent by customers per vehicle in 2005 was $181. In 2011 that decreased to $169 per vehicle. You have to bear in mind that most door rates have increased during that time which makes the numbers look even worse.
There have been several reasons given by industry professionals regarding the decline in customer paid labour, but we have some of our own ideas. It is tough to sell a power steering flush on a vehicle with electronic steer, or get .4 hours labour for changing a fuel filter that lasts a lifetime and is in the tank!
We warned dealers a decade ago regarding the negative impact on labour sales from extended service intervals and changing vehicle technology, when driving a vehicle with ignition points, dwell angles and carburetors the customer could feel the difference after a maintenance service. “Now they only feel a lighter wallet!”
A recent survey from the United Kingdom showed that almost one fifth of customers think that servicing their vehicle is a “complete waste of money” and admitted only doing maintenance service when they could afford it. After 20 years there also appears to be a resurgence in the “do it yourself market” which was estimated last year at 300 million pounds, lost to the professional workshops, which saw their share in the market place drop by 21.8 per cent. We had a chuckle when one service manager told us that customers can no longer do much maintenance to their vehicles: We responded: “Neither can we!”
There is good news
Despite all that, we still believe that the biggest single reason that we don’t get the business is because we don’t ask for it, or don’t know how to ask. This results in leaving huge amounts of legitimate dollars on the table.
For example, we were working in a dealership that has done a brilliant job of selling tires but only has a four per cent tire to alignment sales ratio. We talked to several independent tire stores who were running with a 70 per cent ratio. A lot of the problem comes down to lack of service advisor sales training, an inconsistent customer handling process and lack of coaching.
Think about this. What if we occasionally ask a customer buying tires: “Would you like a wheel alignment today?” Or, what if we ask every customer: “When was the last time you had a wheel alignment done to your vehicle, we strongly recommend it to protect your investment on your new tires?”
So what if the customer still says no? Record it on the work order that the customer was recommended a wheel alignment and declined. Now you have protected yourself against any future tire wear complaints and know that the service advisor asked for the sale. We stopped doing service advisor sales training several years ago, but are more than willing to start again, please e-mail me and tell us if you would be interested.
