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Issue Date: Service Advisor Jun 1, 2007, Posted On: 6/1/2005


Understanding the concept of Effective Labor Rates

Most service advisors earn their pay based on the number of labor hours they sell.  But due to the prevalence of service menus and other forms of discounting, increasingly the focus is shifting from merely selling hours to selling them "effectively."  As a measure of this effectiveness, the industry uses the term Effective Labor Rate. 

 

Labor rates are one of the most "misunderstood and mismanaged" sources of profits in service departments, warns Ray Branch, president and CEO of KEEPS, a fixed operations consulting shop in Raleigh, NC. The reason? "All the variables and balls [service advisors] have to keep in the air." But improving your labor rate even a tiny bit can have a huge, positive impact on your dealership and your pay, Ray says.

 

Why is rate improvement so powerful? "When you improve it there is no additional cost to sales and the net profit goes straight to the bottom line," he says.

 

But to improve the effective labor rate, it is critical at the outset to be clear in your definition of the term. "I've discovered over the years [talking about this] that there seems to be as many as two, three or four different descriptions or definitions of this term," he says. He defines it simply: Effective Labor Rate (ELR) is labor sales dollars coming in from the customer divided by the flat rate hours paid out to technicians. "And the key word here is paid to the technician for getting the work done."

 

ELR is not calculated in terms of hours billed to the customer, he stresses. "The dollars coming in divided by the money or the flat rate hours [actually] paid to the technician is where our real true formula for effective labor rate is at," Ray says.

 

Using Grid Pricing

 

Ray advocates the use of pricing grids as an effective technique for controlling and improving labor rates, but also warns that it is "dangerous" if misused. He estimates that 30 percent of auto dealerships have experimented with Grid Pricing and there have been "lots of miserable failures." For example, a common mistake in Grid Pricing is to try and use it for maintenance work. Don't do that. "The intent is to always use the grid on repair type operations and then use your other measures or techniques for improving the maintenance ELR."

 

A good way to make Grid Pricing work is through weekly meetings where the advisors get together with the service manager to review the use of the pricing grid. "Now you won't have to have these kinds of meetings but a few times and your grid penetration goes from the 60s and the 50s…to all of a sudden it hits 90 overnight," Ray says. 

 

The good news is that grids are easy to install. But to do it effectively you must do several things. First, you must institute one-price selling on the service lane. Second, each dealership must have its own customized formula to work properly in that store's service department.

 

Over the past dozen or so years, Ray has helped create over 85 specific formulas at dealerships including Jaguar, Ford, Honda, BMW, and Toyota.

 

For a sample of what a Pricing Grid should look like, visit www.dealersedge.com and click on "Free Stuff."

 

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