The measurement and management of the effective labor rate has been the focus of many dealers lately — to the point that they over-manage it!

How can you do that? By raising it to the point it no longer satisfies the three masters of pricing and you develop a high-price image in your market. That drives customers away.

We must understand the three masters that must be satisfied when it comes to service pricing. Here they are:

Master 1: Dealership Profit Requirements

Each dealership must have a realistic goal. The key word is “realistic.”

During a training session, I asked a dealer what amount of labor gross profit percentage from his service department would make him happy.

He would not give me a number. His attitude was: “Whatever it is, it's not good enough.” Because his service manager was sitting next to him, he felt if he gave me a number and they achieved it, then the service manager would “lay down.”

I understand but disagree with this management style. We all need realistic goals to manage our business.

Your effective rate must be high enough to yield a gross-profit percentage of 68% or higher, as a minimum, unless you have a “dollar focus” vs. a “percentage focus.”

When I was a service director, I made the mistake of telling my dealer our gross profit was X percent as we walked though the lot. He stopped dead in his tracks and said: “Don't ever talk to me in percentages, I can't spend percentages.” He wanted gross dollars.

Master 2: The Customer

Your pricing must be competitive. If you run the rate too high, you will drive customers away. Remember, new car dealerships (in some cases) deserve the bad brand of “Dealer Prices.” This is what we must try to combat.

Master 3: The Service Advisor

Your advisors must perceive your labor rate as competitive. If they don't buy in, you are done. If they feel it's too high, they'll be unsuccessful in selling efforts.

I asked a service advisor: “Can you sell labor operations at $120 an hour in this store?” His effective labor rate was currently at $60. He said: “No way. We would run customers away.”

I asked, “What could you sell this operation for?” I read him the following: Inspect suspension components, to include: tie rod ends, steering gear box, and driveshaft boots.

This was directly from the owner's manual as a required inspection. I asked, “Could you sell it for $12.95?” He said, “All day long.” I explained to him this was at $129.50 per flat-rate hour. It's all about our perspective.

The focus on increasing effective rate to yield more gross profit is gigantic right now.

I'm constantly asked how to improve effective rate. One way is to enforce your current pricing policy. All dealers have a pricing policy in place. In lots of cases, it's not enforced.

Consider this: A service advisor walks into the service manager's office and says, “We need to discount this or the customer's going to pull it out of here.” The service manager approves the discount, or, the advisors take it upon themselves to discount it when no one is looking.

How many of you allow your car sales people to set the final sale price on new or used units? In the service department, the advisors get away with price setting all the time. Why is this allowed?

Most dealer-management systems have a report that allows you to review discounts per service advisor and by repair order. Have your service managers review that daily until the numbers come up.

In addition, have your service manager write a detailed labor pricing policy and review it with each advisor. Have them sign it, acknowledging that they understand it. Your rate will increase.

But be careful not to run your rate too high. “Competitive” is “comparable.”

The effective labor rate is the average labor sales per hour produced in a specific category of labor. It's as important as the average gross profit per new- or used-unit sold. Measure and manage it daily.

Lee Harkins, president of ATcon in Birmingham, AL, is a consultant and industry speaker. He is at 800-692-2719 and LHarkins@ATconSSE.com

Questions or comments about this column? Send us an e-mail at Dealers@wardsauto.com.