Know your costs and value before asking for that rate hike

By Paul MacDonald, ServiceSource

Most vendors are authorized to increase your warranty rate annually, up to a set percentage, but only if and when you ask for an increase. The onus is therefore on you to ask for it, so add it to your calendar every year so you don’t forget. Add it to your calendar right now!

The increases vendors award are on merit, meaning they must think that the rate increase is justified. Don’t be afraid to ask for an increase, but be sure to have your data to back up the cost of a truck roll and why you deserve the higher rate.

There are several key performance indicators (KPIs) that the vendors are rating you on, including any or all of the following:

  • Quality of service (QOS) score compared to the national average
  • Parts usage per claim compared to the national average
  • Repair turnaround time (RTAT) compared to the national average
  • First call completes (FCC) compared to the national average
  • Accepts sealed system repairs
  • Takes warranty calls on products not purchased at your store
  • Number of returns and product exchange requests compared to the national average
  • Customer satisfaction with the service experience or Net Promoter Score (NPS)

If your current COD or cash-call rate is published at $85 for a service trip fee and you’re looking for a higher warranty rate than your COD rate, you’re going to have some explaining to do. Make sure your house is in order before contacting your regional service manager for each brand you do warranty repairs for. If a manufacturer offers you an $84 warranty call rate, you can’t simply demand more without justification. Prepare yourself before asking a manufacturer for a warranty rate increase.

Here are five steps to prepare for negotiations:

1. Know that your numbers for the KPIs listed above are to your advantage. Have an explanation for those you don’t know. Like anything you sell, you must know what it costs before setting the selling price, and warranty service rates are no exception.

2. Know the cost of running a truck. The simple method: Take the total expenses for the service department and divide them by the number of truck rolls run in that period. The result is your cost per trip. Next, compute how many first-call completes you had and how many return trips you made. Doing so helps you gauge your required warranty reimbursement rate. If the cost to run a trip is $100 and warranty calls take an average of 1.5 trips, you need to be reimbursed $150 per warranty call.

A more in-depth method is to calculate your current cost of doing business (CODB) and use that in your service rate calculation. You can access an online CODB calculator here. Service rates are based on the technician’s wage, department overhead and profit multiplied by the service department efficiency.

Service efficiency is measured by the ability to resell as many of the technician hours as are paid to technicians daily. Efficiency is also known as first call completes or completed calls per day. If you are not measuring this metric, you should do so immediately. It’s an eye-opener. Once the department begins counting, completed calls will improve because everyone is now watching for them. If a technician completes four of their eight dispatched calls in an eight-hour work day, his efficiency is 50%.

Service rates = [Tech hourly wage + hourly overhead] × profit × department efficiency

Efficiency = completed calls per day ÷ technician hours paid per day

3. Know your service area and the distances you are prepared to drive for warranty service calls. Given today’s higher fuel costs, you should have a mileage clause in every service agreement. Geographic areas are different, but a 20-mile radius around your shop is an excellent place to start. Any service calls beyond the 20 miles will incur a mileage charge on top of the negotiated warranty rate per call.

Check the going rate per mile and decide on what figure you will accept. The 2022 IRS-allowed rate for business travel is up 2.5 cents, to 58.5 cents per mile driven for work. I would start at $1.50 and come down from there as necessary. Once you have a mileage clause in your contract, start using it on every warranty call with no exceptions beyond your radius. You must also manage your ZIP code list or radius for warranty calls.

4. Self-servicing dealers have an advantage that independent service providers don’t — they sell the product. Don’t be afraid to use your sales department to your advantage while negotiating. Have your sales manager sit at the negotiating table with you and the manufacturer’s sales rep if possible. How much you sell for each brand can carry significant strength in negotiations. Some manufacturer sales reps have access to discretionary marketing funds that can often supplement low warranty rates when the service manager can’t move to the amount you need.

5. Understand the actual cost vs. warranty rate. Consider the cost of servicing that brand along with profitability. Factor in the ease of doing business, shipping and freight, co-op support and back-end funds, rebates, and return policies.

It’s also good to know who the other servicers are in your market. If Brand X has no other options but you, your negotiating hand just got much stronger. If you can’t negotiate a good deal, then it’s not worth doing warranty service for that brand.

AVB’s ServiceSource lead 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 (647) 500-7785 or paul.m.macdoanld@pmdgroup.ca.