You must take action to counter higher costs
By Paul MacDonald, Expert Service Program
Inflation has a significant impact on your retail and service operations.
Unless you’ve been living under a rock, which incidentally I wouldn’t blame you for, you’ve experienced rising prices for goods and services all around you and, more importantly, in your cost of doing business.
Very little in our day-to-day lives has escaped rising costs, including fuel, groceries, lumber, and appliances. And with the war raging in Ukraine I have to assume it’s going to get worse before it gets better.
Manufacturers have increased wholesale appliances prices three to five times during the last two years, driving retail prices upwards of 20 percent. Being a sharp business owner, I’m sure you took appropriate actions to increase your prices in line with those of your suppliers. Manufacturers are no longer holding prices; you have to place your order to guarantee costs, forcing you to warehouse appliances until your customers are ready for delivery. (Hmm, increased warehouse costs.)
Setting retail prices for appliances is a straightforward acquisition cost + markup or margin calculation. Ensuring sufficient gross margin to cover expenses resulting in profits is the retailer’s ultimate goal.
But what about the service department? Have you increased your service rates to cover the soaring costs of a truck roll? In my experience working with dealers across the country, most CEOs and CFOs tend to simply add an arbitrary dollar amount to their service rates and hope for the best results.
BrandSource conducted a cost of a truck roll survey in the summer of 2020, and the results were surprising to most members at that time. Imagine what the results would be if the same survey were conducted today with the recent escalation in business costs. And it’s not over yet!
I’m not an economist and don’t know when inflation will return to an acceptable rate, but until it does, it demands you take action, or your business won’t survive.
If you did increase your service rates recently, was the increase enough?
How do you know? If you haven’t increased your service rates, why?
The cost of a truck roll is not like the fixed cost of an appliance. Service rates are based on the following formula:
Service rates = (tech hourly wage + department overhead + profit) x efficiency
At Summit this month, I led a how-to workshop on calculating your service rates based on the cost of doing business. I went step by step on how to calculate your service rates based on your costs. In case you couldn’t attend, here are the steps and numbers you’ll need to set your service rates based on your cost of doing business. Once you determine what your new service rates need to be based on your CODB, I’ll show you how you can modify the online version of The Original Blue Book, Major Appliance Job Rate Guide to deliver those rates on every service call.
You’ll need these following financial numbers for your business to fill in the blanks in the online CODB calculator at www.CODBcalculator.com. Who knew it could be this easy? You’re welcome!
- Production hours available to resell. (1880 sample)
- From 365 days, subtract all the time off you allow your techs. Sample co. is 235 days.
- Multiply the number of days and hours worked per day, 8 x 235 = 1880 hours.
- Full-time technicians in your company. (2 sample)
- Multiply the number of techs by the hours available to work 2 x 1880 = 3760 hrs
- Average hourly labor cost. ($29.11 sample)
- Convert all wages to an hourly rate and find the average technician wage. $26.32
- Average gross labor cost = average hourly rate x 2080 (52 wks x 40 hrs) $54,725
- Average hourly labor cost = average gross labor cost /1880 or $29.11 (sample)
- Total expenses to run service business (not including labor) ($112,552 sample)
- You should include rent, utilities, office equipment and supplies, phone, internet, insurance, taxes, management, admin support, uniforms, trucks, cell phone, licenses, subscriptions. There is a lot to include both in the business and technician overhead. Be diligent and thorough, no guessing!
- Parts income per hour. ($7.98 sample)
- Part sales – parts costs/ available production hours. 112,000-82,000=30,000/3760=7.98
- Desired profit margin from service operations. (20% sample)
- Whatever you think is fair. Shown as a decimal .20
- We’re not in business to lose money. If you want to give away, give to charity not your business customers.
- Your company’s efficiency factor. (50% sample)
- Efficiency = completed calls per day/technician hours paid per day
- Eight completed calls divided sixteen technician hours( 2 techs) = 50% efficiency
- A target efficiency goal for a service dealer should be 60-70%
These numbers from your business are required to calculate what your service rates should be to deliver profitable results. Go to the online calculator www.codbcalculator.com and plug in your numbers to get your results. The calculator will provide you with the average hourly rate you need in your business. With this number, you can then modify the settings for both trip fees and labor codes in the Blue Book so that the average service call is now based on your cost of doing business in service. If this number is too high for your market, you have to increase efficiency or decrease expenses or wages. The easiest place to bring about change is in the efficiency of your operations. I’ll share more on this next month.
On a recent dealer visit in Iowa, a BrandSource member shared his experience raising their service rates by 35% after reading AVB’s Service Playbook. “I had zero pushback and no complaints. I wish I had done it sooner,” he said. When asked what had held him back, he replied, “Me, I was afraid to raise my prices.” All too often, the owner’s fears get in the way of making money from service operations.
Service operations can be profitable if you let them!
On another recent call with a BrandSource member, it was revealed that they had stopped taking COD calls because they could not keep up with the demand for appliance repairs. The member complained that he will lose over $300,000 this year in service. It’s no secret that it’s tough to make a profit on warranty service.
The secret is in having the optimum warranty to COD ratio that will compensate for the negative margin from warranty work. The goal for any self-servicing dealer should be a 30% or less warranty to 70% COD cash calls ratio. It’s hard to get there but not impossible. This dealer, who was overwhelmed with service demand, needed to hire more technicians, not turn away COD service calls.
BrandSource service consultant Paul MacDonald ran his own 38-tech service business and is a past president of the UASA. He currently operates the Expert Service Program, which helps servicers run their operations more efficiently and profitably. You can reach Paul at Coach@ExpertServiceProgram.com.