Tuesday, September 20, 2011

What's my Effective Rate?

I facilitate a Virtual Performance Group each month for Dynatron Software and our last months topic was on Effective Rate. We took a look at a group of dealers on a spread sheet and they were ranked based on there Customer Pay Effective Rate.

The Top was at $122, the Average at $95, and the bottom was $69. The dealer group is of the same manufacture however the discrepancy between Top and Bottom is huge. Here's what we found:

  • Top Dealer was at 2.6 HPRO @ 85.1% GP
  • The Average Dealer was at 2.7HPRO @ 79% GP
  • The Bottom Dealer a whopping 4.7HPRO @ 73.8% GP
Now most Dealers I know would rush back to the service department looking for the service manager and say why are we not on the top of this list? I guess at first look and not knowing what to look for he's right however he would be making a big mistake without further review.

Here's 10 items you should look at before making any changes:

  1. What is my Cost of Sale? 
  2. What am I paying my Technicians in Hours for these jobs?
  3. Is my Door Rate competitive within my market area?
  4. Is my Door Rate going to achieve my Gross Profit % Goal?
  5. What am I selling my Maintenance work at per hour?
  6. What am I selling my Repair work at per hour?
  7. Do I need a Grid Pricing structure? Does it need to be adjusted?
  8. Does the Service Advisor's Pay Plan reward what I want repeated?
  9. Is my dispatching structure fair and productive?
  10. What are my Op-Codes charging out?

 The good news is most DMS will have a report to show you your Cost Of Sale, Overall Effective Rate, Individual Effective Rates for Customer Pay, Warranty, and Internal. I use a Try-On Calculator to determine how much I need to adjust my Customer Pay Effective Rate so I keep my Gross Profit % in line.

Here's an example of the Try-On worksheet:

Customer Pay Labor Sales: $287,987.00 / Total Labor Sales: $389,033.00 = 74%

Warranty Labor Sales: $57,546.00 / Total Labor Sales: 389,033.00            = 15%

Internal Labor Sales: $44,369.00 / Total Labor Sales: $389,033.00             = 11%

Now apply the percentage to each labor type:

Customer Pay Effective Rate: 68.76 X Customer Pay Percentage: 74%        = 50.88

Warranty Effective Rate: 80.00 X Warranty Percentage: 15%                      = 12.00

Internal Effective Rate: 65.00 X Internal Percentage: 11%                            = 7.15

                                                                             Overall Effective Rate:   = 70.03

Let's say my cost of sale is $25.00 and I need an Overall Gross Profit of 70%. Here's what I do to determine how much more my Customer Pay Effective needs to go up.

Cost Of Sale: $25.00 / 30% = $83.33 Overall Effective Rate Needed.

Overall Effective Rate Needed: $83.33 minus Actual Overall Effective: $70.03 = $13.30

So I need to increase my Customer Pay Effective rate by $13.30 or sell my customer labor at $82.06 to achieve my Goal of 70% gross profit. Now there are three other options which include reducing Technician Cost, increase your Internal Rate, or ask for a Warranty Increase however if the Warranty rate is already at $80.00 my first action plan would be to increase Customer Pay by at least this amount.

For more information or a free Demo on Dynatron's Virtual Performance Group or any other software they offer contact Dawn Leclercq at: 866-888-3961-Ext:100 or E-Mail: dleclercq@dynatronsoftware.com

Guy Salkeld is the President and Head Performance Coach of Automotive Consultants Group Inc. The only Low Risk High Return Training, Coaching, and Consulting company in the world! To learn more go to www.smartservicetraining.com  Have a question? E-Mail Guy directly at guyacg@aol.com or Call me direct at: 305-331-3373    

Dynatron Software

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