Keeping Your Shop Competitive and Profitable
By Bob Cooper
I am sure we can all agree that our industry, and society, has been going through quite a transformation. One of the changes that’s had an extraordinary impact, and will have an even bigger impact in the coming years, is transparency. Not only do today’s consumers have an expectation of transparency, but they have access to pricing information that was beyond our wildest dreams just a few short years ago. Just look at all the major retailers. With rare exception, you can walk into any consumer electronic store, appliance store, or in many cases even the home goods stores, and you’ll find that they not only offer price matching, but they put their price guarantees front and center. This is a growing trend, and there is no question that it comes from one source. The retailers are very well aware that their customers have something they never had in the past – access to pricing information that is literally at their fingertips. So here’s my recommendation to you as a shop owner: take a different path than your competitors.
First of all, we all know that in order to operate a successful auto repair shop you need to maintain a certain level of gross profit. Accordingly, what most shop owners will do is establish gross profit margins on their parts, and they’ll typically set a different gross profit margin on their direct labor. The common numbers are 50% on parts, and 70% on labor. Combine the two together, and they get the overall gross profit they are looking for. As you can imagine, this is what they learned from their mentors, and although it worked in the past, the times have changed.
In today’s transparent world, one of the first things customers will scrutinize is the price of the parts you have installed on their vehicles. Now we all know that well-skilled service advisors can take the focus off of the price when providing a service recommendation, and we know they can do a reasonable job in answering questions about their part prices, but no matter how skilled they are, I am sure you will agree; it’s a tough sale at best. So consider this scenario….
There are two shops performing the same repair on identical vehicles, and each shop charges $1,000.00 for the repair. The only difference between the two jobs is that Larry’s Auto charged $500 for the parts and $500 for the labor, whereas Elite Auto Service charged $400 for the parts and $600 for the labor. If Larry’s customer discovers he could have bought the parts for substantially less, and questions the integrity of Larry’s price, then Larry is in trouble. On the other hand, by being more competitive with part pricing, Elite’s customer is comfortable with the price he paid for his parts. Now at this point I know what some of you are more than likely thinking; what if the customer questions the labor charge at Elite? If that question is going through your mind, all that you need to do is ask yourself if you’d rather defend the price you charged for the service provided by your talented technicians, or the price of your parts? For me, that’s an easy question to answer, and the best example I can give you would be the fees charged by physicians. You and I may expect the price of bandages and medicine to be the same between two doctors, but we know we’ll be paying more if we see a leading surgeon. Not only would we expect to pay more, but we’ll probably feel good knowing that we are being cared for by the best.
In summary, in the customer’s mind parts are parts, but as we all know, those superstar techs who work with you can’t be compared to the guys down the street. This is why I strongly encourage you to ensure that your high profiled parts are competitively priced, and make up the difference in your labor charges. It will keep you competitive, and better ensure your success in the coming years.
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