This is Part 2 in a two-part article. View Part 1 >>
Are We Competitive?
We often work with clients to create Maintenance Menus. During this process we ask the Service Manager to provide a list of commonly performed services. We review current charges for the services, the contribution of parts and labor, and the flat rate times technicians are paid.
More often than not, these services yield lower than average gross margins. In some cases, even a loss. When Service Managers are questioned on why we would offer a service at such a low gross margin or loss the answer is typically the same. “We have to be competitive.” But are we? What we find is that our managers create a total price to sell the service. Then they negotiate with parts how much their portion will be. The difference is the labor charge and the flat rate times are usually not even considered.
Is this how to be competitive? Before we can answer that question, we will need more data. We would recommend a local competitive market study of these services. Only then can we decide what competitive pricing is in our market.
Here’s an example:
4 local aftermarket service providers were called. The average price for an oil change was $59.84. Our client was charging $49.95. $35.00 of the service was for parts and $14.95 was labor. Their technicians were paid .3 in labor to perform the service.
We decided to adjust the service to $61.95 which was $2.11 above the average aftermarket service provider. After performing a parts cost average, we determined that $40.10 would yield us a 41% gross profit margin on our parts. The difference of $21.85 was used as our new labor charge. We left the flat rate time at .3. The effective labor rate increased from $49.83 to $72.83.
This client performs an average of 1000 oil changes per month. The $12.00 increase will yield an additional $12,000 in gross profit per month.
Are We Profitable?
Now that we have determined we are competitively priced, let’s see if we are profitable.
Earlier I mentioned performing a parts cost average to determine what our part sales would need to be to yield a 41% margin. A parts cost average takes the cost of a part (say an oil filter) and multiplies that cost by the amount of times it was sold in a twelve-month period. You would then repeat that exercise for every part number of oil filter sold. Once we’ve determined our cost average, we can apply a mark-up that will yield our gross margin. Based on our desired net, we can apply a mark-up that will yield our desired profit margin.
On the labor side we have a $23.00 increase in effective labor rate so we might assume this increase will make us profitable. Let’s do the math and see.
This client has 8 Express Technicians. All of the Technicians make $10.00 per clock hour and are scheduled to work 40 hours per week. Some quick math says our average cost is $10.00 per hour and if we subtract that from our effective labor rate of $72.83, we will get our gross profit of $62.83. But is our average cost $10.00?
On an average week the Express Technicians in this shop are clocking 42.5 hours per week. In this area overtime law is time and a half. The overtime rate in Express is $15.00 per hour. The average Express Technician is flagging 20 hours per week. Do you still think our average cost is $10.00?
This chart shows how technicians producing fewer flat rate hours than they are clocking, along with overtime, has affected our cost of sale. Our effective cost of sale is $21.88. Is $21.88 per hour an acceptable cost that will yield you the level of profit you desire? How much are you paying people to change oil?
This is just a small example of the hidden detail we can uncover in your store. This information will allow us to create a strategy to increase your profits. My goal is to help you have loyal customers, happy employees, and make some money, too.
Written by Mark Guido
If you would like to chat about the details in your store give me a call at 727-946-7731 or email me at firstname.lastname@example.org.