That was the topic of conversation in a recent Fixed Operations Clubhouse meeting.
If you haven’t had the opportunity to check out the clubhouse app, please be sure to do so. There are industry leaders and experts that go over strategies and dynamics of industrial challenges to provide group-driven and real-time advice on the topics that are on everyone's mind.
In this article, I am elaborating on my thoughts on the importance of ELR (Effective Labor Rate) within your business. Please note that I will be focusing specifically on customer pay business.
ELR definition and calculation - Effective Labor Rate is the average dollar amount collected for a flat rate hour. The calculation for ELR is the total labor sales dollars divided by the total hours billed in a given period. This metric is also a key component to raising your warranty reimbursement rate with the manufacturer.
Things that affect ELR
Work Mix - The different types of work that are coming into your shop significantly affects ELR. Knowing the types of work also allows you to plan technician skill level requirements to meet work type and schedule to meet demand. Hopefully, you are not charging the same labor rate for brakes as you do engine repair. Such pricing strategies reinforce the customers’ perception that dealers cost too much
I recommend that you employ a variable labor rate strategy based on skill and market category. Doing so affects the amount you collect for each labor hour billed and allows you to compete on specific job types.
There are three categories of labor rates that I recommend.
Competitive - this is a rate that you use for items that the guest can get from your competitors with ease. Tire balancing, tire repairs, and alignments are great examples. You don’t do a tire repair at your door rate, right?
Maintenance - This is a rate for your services that most customers already have a perceived value for. Think oil changes, fluid exchanges, spark plugs, cabin filters, etc. Typically, these are items that are found in the owner's manual on the maintenance schedule.
Repair - This category requires the highest skill level and does not require any reduction in your door rate so long as your door rate is priced properly to the repair market. This includes Engine, Transmission, electrical diagnosis, and other specialized “captive” repairs.
If your team does an absorbent amount of maintenance or competitive services then your effective labor rate will be lower than if you were performing heavy line repairs. Maximizing hours closed each day and producing quality hours will yield tremendous results. If you are a heavy maintenance shop then that is fine so long as you establish a base line for your production staff. You must shop your competitors to price your labor at what it is realistically worth. The customer is concerned about a fair price in the marketplace. We must be competitive in all labor types to break the image of expensive dealership service.
Advisor discounting - Any reduction in billing the labor charge will affect your ELR. If your advisors are granted access to discounting or simply override your pre-determined labor charge they are affecting your ELR. I think that advisors should be empowered to satisfy your guests. I am okay with advisor discounting as long as it is tracked and logical. We manage these concepts with coachable moments. However, I do not think that an advisor should be able to “override” the actual labor charge. The labor should be discounted and not overridden. This provides for better tracking and accountability purposes. NOTE: know where that discount is applied on your financial statement to help you dial discount expenses in.
Improper Labor Operation Code setup - If the hourly value of a specific labor operation is inaccurate it will askew your ELR. For instance, your oil changes are listed as paying 5-tenths to the tech with a maintenance dollar sell value equal to 4-tenths. A one-tenth variance, especially on a high-volume service, is significant to your ELR. Alternately, you may have hourly associates in detail or on your lube rack and you may also show discrepancies in labor time vs. sale amount values. Your pricing strategy has to be consistent.
Effective labor rate can be used as a tool to identify sales performance within specific categories. If it is a part of your service advisor pay plan it can also negatively affect your level of customer service. ELR should not be an end-all-be-all driving metric. It is only one of the seven controllables in the service department. ELR is subject to severe fluctuations from one repair order to another. Work Type, Discounts, Omissions, Service Advisor Discretionary Pricing, Improper DMS Setup, and your service pricing strategy use can all affect ELR. The most important thing to keep top of mind is that it is extremely difficult to control ELR and improve customer pay market penetration without developing a competitive pricing strategy. It should be every dealership's goal to show your customers the value and convenience of doing business with you. Set your store apart from the competition and break the stigma that dealerships are too expensive. ELR, although important, should not be the leading factor.
With a proven track record in dealership fixed operations maximization and customer service for over 25 years I can help. Don’t hesitate to reach out anytime at (813) 602-1964 or email me at firstname.lastname@example.org