Fixed Ops Journal - October 2017 - 32

FIXED OPS JOURNAL

PROFIT BUILDER

GROSS
PRODUCT


Strategies for raising shop labor rates boost income, attract skepticism

ALYSHA WEBB
foj@autonews.com

ike fixed operations managers everywhere, Doug Shipp wanted to
improve the gross profit from
his service department's labor.
Shipp, service and parts director at
Tafel Motor Co., a Mercedes-Benz dealership in Louisville, Ky., reviewed the
rate his shop charged for customer-pay
work: $130 an hour for each repair job,
no matter how complex.
That single rate no longer made sense.
So in January, Shipp started charging
$140 an hour for nonmaintenance repairs, such as suspension work.
A month later, he created a top rate of
$150 an hour for highly skilled jobs, such
as heavy engine work. He kept the $130
rate for routine maintenance.
The result? "The tiered rate has helped
me absorb my discounts" on such items
as customer oil changes, Shipp says,
"and still maintain my high level of gross
profits."

Market research
The cost of labor is a key part - some
say the most important element - of the
equation that enables a dealership to
cover most or all of its fixed expenses
through service department income,
commonly called service absorption.
Fixed ops managers use a variety of new
strategies to achieve their profit goals.
"The only thing you have to sell in the
FIXED OPS JOURNAL ILLUSTRATION
service department is labor," says Jeff Badealers to survey their competitors' service
kich, a dealership management consultant
labor rates every six months.
and NADA 20 Group moderator.
"Always know what local dealers are
Labor in the service lane creates its own
charging, so you are earning the market averprofit center and is accounted for separately
age," Bakich says. "You just call everybody and
from parts sales. The NADA Academy, which
ask what their rates are.
offers dealer training, recommends that the
"It is almost a guarantee that if you haven't
standard rate for retail gross profit from labor
raised your labor rates in six to eight months,
sales should be 73 percent.
you are going to need to bump them up a dolThat is, if a dealership charges a customer
lar or two," he adds.
$100 for labor, $27 of that should go to the serAt Tafel Motor Co., Shipp says, gross profits
vice technician as wages, leaving $73 as gross
on customer-pay service work amount to 80
profit.
percent of total labor sales.
If a dealership isn't hitting that profit target,
Service departments have three categories
it is likely charging customers too little for laof labor: customer-pay work, warranty-relatbor, Bakich told Fixed Ops Journal. He advises

PAGE 32

OCTOBER 2017

Rate setters
Dealership service departments'
labor-rate terms
Customer-pay: The undiscounted
rate a dealership charges
customers
Internal: The rate dealerships
charge themselves to recondition
used vehicles for sale - usually
the same as the customer-pay
rate
Warranty: The rate an automaker
pays a dealership to make
warranty-related repairs
Flat: A set rate that a dealership
pays a technician for each type of
service job
Effective-labor: The amount a
shop makes per billed hour,
calculated by dividing total labor
sales by hours worked

ed repairs and internal work for such
things as reconditioning of used vehicles
before sale.
Overall, Shipp says, every dollar of service labor revenue earned by his shop
includes 83 cents of gross profit.
Because his market has no competing
Mercedes stores, Shipp says he benchmarks the labor rates of other local luxury
dealerships, such as those that sell Audi,
Porsche and Jaguar Land Rover vehicles.
His new three-tiered service rates
haven't hurt customer satisfaction,
Shipp says, because price is not his main competitive advantage.
"The actual cost of the labor is secondary to
the perceived value for the work done," he
says. "Customers attach a value to overall experience. We have to deliver a premium experience that is reflected in the overall costs."

Tech mix
Jeff Earnest, service director at Royal Nissan
in Baton Rouge, La., says he charges $125 an
hour for customer-pay work.
His service department's gross profit from
see LABOR, Page 33

Table of Contents for the Digital Edition of Fixed Ops Journal - October 2017