How to prepare for a warranty contract negotiation
By Paul MacDonald, ServiceSource
Last month we spoke about the importance of saying “no” to a bad warranty service contract. But before you walk away from that OEM offer, try negotiating.
In contract negotiations, saying no can be used as a strategic tool that allows you to protect your interests and ensure the success of your business. While it may be uncomfortable sometimes, it is essential to recognize situations where it may be necessary to assertively, but professionally, decline. (You never want to burn a bridge as OEM managers and policies change.)
Effective negotiation skills and the ability to stand your ground when needed are valuable assets in all aspects of business; they will help you secure mutually beneficial agreements and achieve long-term success. So before you give your final no, prepare to negotiate. Here’s how:
Know the cost of a truck roll. Like anything you sell, you must know what it costs before setting the selling price, and warranty service rates are no exception. 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 had. Doing so gives you a clearer understanding of what warranty reimbursement rates you need to maintain a profitable business. If the cost to run a trip is $100, and warranty calls take an average of 1.5 visits, you must be reimbursed $150 per warranty call.
A more in-depth method is to calculate your current cost of doing business and use that in your service rate calculation. You can access a CODB calculator in the BrandSource Backroom. Service rates are set based on the technician’s wage, department overhead and profit multiplied by the service department’s efficiency (see formula below):
Service rates = (Tech hourly wage + hourly overhead) x profit) x dept. efficiency
Service efficiency is measured by the ability to resell as many 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 start 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 his eight dispatched calls in an 8-hour work day, his efficiency is 50%.
Efficiency + completed calls per day ÷ technician hours paid per day
Know your market. Know your service area and the distances you drive for warranty service calls. With increased fuel costs, you should have a mileage clause in every service agreement. Geographic regions are different, but a 20-mile radius around your shop is an excellent place to start. Any service calls beyond 20 miles will incur a mileage charge on top of the negotiated warranty rate per call. Check the going rate per mile and decide what number 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 higher and come down from there as necessary. Once you have a mileage clause in your contract, use it on every warranty call with no exception beyond your radius.
Note: Know that GE has removed all mileage from the service contracts of self-servicing dealers. The vendor has also increased the minimum order value on parts orders to avoid shipping fees. Such policies are concerning when ordering oversized parts to prevent additional shipping fees.
Take a power advantage. Self-servicing retail 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 warranty rates. Have your sales manager the manufacturer’s sales rep sit in when possible. How much you sell for each brand can have significant leverage 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.
Know what it costs by brand. Understand the actual cost vs. the warranty rate. Consider the cost of servicing that brand along with profitability. Consider such factors as the ease of business, shipping and freight, co-op and back-end funds, rebates and return policies.
Check out the alternatives. If the manufacturer uses the argument of a preferred service provider in your market, check how often they visit and how long your customer will have to wait for service. Anything over a week for a non-functioning product is unacceptable. It is good to know who the other servicers are in your market. If Brand X has no other options but you, your negotiating stance gets much stronger.
Remember though, if you can’t negotiate a good deal, it’s not worth doing warranty service for that brand, and it’s time to say a final no. Push those calls back onto the manufacturer and spend your time on more profitable COD calls.
Paul MacDonald, AVB’s senior ServiceSource lead, 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 at Paul.m.Macdonald@brandsource.com.
