Don't leave money on the table. Here's how

At a time when dealerships need fixed ops revenue more than ever to maintain profitability, an inconvenient truth lurks in many service departments nationwide: The price is not always right.

"Poor pricing is rampant," says Rick Wegley, an instructor and field consultant at NCM Associates, a dealership training and consulting firm. He's worked at dealerships for 27 years, including stints as a fixed ops director at three Kansas City-area stores.

As proof, Wegley cites anecdotal evidence gleaned from years of consulting and data culled from the top half of about 8,000 reporting NCM clients. The numbers show net profit as a percentage of gross profit for those roughly 4,000 service departments in 2020 was slightly more than 20 percent. The goal is 30 percent, which is definitely attainable, he says.

"We're underperforming as an industry," Wegley says. "Dealerships are leaving a lot of money on the table."

Several factors contribute to bad pricing practices. For starters, many dealerships don't know how their rates stack up against those charged by competing independent shops and chain stores, he says.

In addition, service advisers too often become customer advocates because they don't fully understand the rationale used to establish prices. As a result, they often sympathize with price-shocked customers and proactively offer coupons or discounts, he notes.

"They feel like they're selling from their own pockets," Wegley told Fixed Ops Journal.

But it doesn't have to be that way. Consumers typically don't patronize dealership service departments because they're less expensive. Instead, they do so because they trust they're getting quality workmanship, factory-trained technicians, warranties and OEM parts, Wegley notes.

"Customers are willing to pay more for that," he says. "But there's a tipping point."

How do dealerships find that point? Wegley says prices are appropriate when they generate sufficient profit margins, they are palatable to customers and service advisers can confidently defend them while selling repairs.

"If you have to offer discounts, you're priced too high," he says. "And if advisers don't believe in your pricing policies and can't defend them, in many cases they'll offer discounts."

Market surveys are a key tool in determining appropriate labor rates for maintenance and repair work. Dealerships can hire a marketing firm or have employees "mystery shop" by phone to determine the going rates, he says.

"I recommend doing a market survey every six months," Wegley says. "That doesn't mean you need to change prices every six months, but you need to know what the market is doing."

If a survey shows a dealership is charging significantly less than competitors, prices can be raised incrementally or exponentially.

"If you're nervous about ripping off the Band-Aid, then do it incrementally," he suggests.

But Wegley warns that increasing the labor rate for repairs won't boost profit margins as dramatically as increasing the labor rate for maintenance items, such as oil changes, tire rotations and wheel alignments. That's because service departments sell many more hours of maintenance work than repair work, he explains

"I'm not saying it isn't impactful, but it's probably not the best place to start," he says.

Dealerships also should better educate service advisers about the factors that go into developing prices. Understanding these dynamics makes it easier for them to believe in price structures and confidently counter price objections from customers, Wegley says.

If service advisers can't break a long-ingrained discounting habit, Wegley notes that some more robust DMS platforms allow service managers to prevent discounts and price overrides.

If that technology isn't available, it's time for what Wegley calls accountability management. That means setting clear goals and expectations for service advisers and setting a firm timetable for showing improvement, he says.

In many instances, customers will need training, too. Reshaping their expectations about discounts will take time and there could be pushback, he says.

On the positive side, Wegley says he knows advisers who stopped handing out coupons — and customers rarely said anything about it.

Wegley also cites one service department that didn't change its price for oil changes for 12 years. The department does about 5,000 oil changes a month, and when prices finally were raised, only five customers complained.

"It's all about having a conversation — providing context for customers," Wegley says. "But you need to keep track of complaints, too. If you're encountering a lot of customer dissatisfaction and losing business, it's time to reconsider if the price really is right."