Dave Baiocchi

Inflation Strategy – Part 4

Posted on Jul 20, 2022 in Featured, Features

The summer of 2022 is not really looking better than the Spring.  the business climate is still tenuous as labor issues, COVID variants, and geopolitical uncertainties create continue material and labor shortages.  Our biggest obstacle is the meteoric rise in inflation.  Over the past three articles, I have laid out a series of strategies that could be employed to realign the policies and practices inside your dealership.  We must be pragmatic in making intelligent decisions in response to a very different distribution landscape.

My prior articles have touched on different approaches to assessing progress and setting goals using a SWOT analysis.  I have also suggested strategies for maintaining your revenue stream in sales, by reexamining dealership policies governing rental retirements, and long-term rental contract extensions. I offered ideas about maintaining your sales department profitability by keeping pricing policy “ahead” of the inevitable OEM price adjustments, even for units currently on order.

I also touched on ways we could adjust parts policies regarding inventory decisions, vendor selection, and expense recovery. Leveraging the rise in inventory value, that is automatically created during an inflationary cycle is a key factor in maintaining profitability during these times.

In this article, I want to turn my attention to the service department, and how the changes in the marketplace give rise to both opportunities and risks that we must prepare for.

Labor Rate Methodology

Inflation is dangerous because it feeds a vortex of two market forces.  Prices rise…. but so do wages.  It’s a simple cause-and-effect construct.  To remain competitive and maintain your position as an “employer of choice”, you must increase your wages.  As wages rise, the amount of dollars entering the economy grows ever larger, thereby forcing prices even higher.  This price-wage vortex is difficult to control, and once again, we need to stay “ahead” of the curve.

Inflation and wage growth do not change the long-standing “best-practice” ratios that serve as guideposts for setting (and adjusting) retail labor rates.  The proven ratio is 3.2 to 3.6 times journeyman wages paid. If you are paying your journeyman technicians $35 an hour, your effective retail rate should be between $112 and $126 an hour.  If you are constrained to pay $42 an hour due to inflationary wage growth, your rates need to follow suit at between $135 and $151.

This will be uncomfortable, and awkward, especially if you have to enact multiple rate increases during the same calendar year.  As disquieting as this can be, we must be committed to our ratio. The math does not change because the costs are rising.  We must keep pace.

You may want to exempt the selected customers from the increase.  I get it.  I’ve been there.  May I suggest however that instead of exempting them completely, you instead attempt to ramp them into a higher rate over time?  If they are already enjoying a discount from your effective rate, calculate the percentage increase represented by the retail rate hike, and cut it into three to six segments, enacted over a period of months.

Instead of a $15 jump in rate all at once, you make an agreement to step up smaller increases every 60 or 90 days.  Once your train your customers that they can expect to be insulated from rate increases, you will find it hard to unwind that expectation.  If your methodology however rewards their loyalty with gradual increases over time, you may find it easier to manage this process.

Callout Fees

As hard as it will be for customers to stomach rate increases, it will be even more difficult for them to accept paying those rates for travel time.  This is a recurring theme in dealerships all over the country.  Customers can see the value when the tech is actually onsite making repairs, but not so much when they are sitting in traffic logging windshield time.

I have long been a proponent (especially for customers within a 60-mile radius) of establishing a flat rate call-out fee for field repairs.  Charging a different amount every time a customer contacts our dispatch desk is already infuriating your customers.  Raising the bar on that price only heightens the level of frustration.

Some dealers charge travel time based on “zones”.  Travel charges are flat rated based on how far the customer is from our dealership.  Most of the time, however, we dispatch a technician directly from his remote location to the customer’s place of business.  The only time we might dispatch them directly from the dealership is for the first call of the day.  So, is your zone charge accurately representing the cost of travel?  Maybe…or maybe not.

You may want to consider a flat-rate fee for all dispatched field calls in your service area (60 miles).  Whether the technician is across the street, or across the county…. it’s the same price every time.  Customers will know what to expect, and there will be much less frustration connected with service invoicing.  Rural customers outside the 60-mile zone can still be charged hourly, but truth be told, they expect it, and are generally less sensitive to travel time than their in-town counterparts.

Setting this callout fee is not really that difficult.  If your dealership uses a GPS service provider (which most do) you can use the GPS reporting data to separate transit time from on-site time.  Use the fleet average on travel to extrapolate the average total transit time per tech, per day.  Apply your effective hourly rate and set your callout fee.  Remember to account for things like lunches, commute time, and other anomalies.

Surcharges – Fuel

Our current inflationary cycle is driven by fuel prices.  These prices are unpredictable.  It’s not a good idea to try and recover a spike in fuel prices, with a rate increase.  Wages should drive hourly rate increases…not expenses.

This highlights another area of frustration for customers.  During times like this, when fuel prices are running well in excess of historical norms, you have to have a way to recover the expense of fuel that is reasonable and understandable.

The “understandable” part is where dealers and customers tend to have a conflict.  When do you enact a fuel surcharge?  How is it calculated? How is it invoiced? Does it apply to every road service invoice?  How do you adjust it?  When do you discontinue it?

Believe it or not, many dealers have no real strategy, or arithmetic formula when it comes to applying fuel surcharges.  If we want to manage our customers’ expectations going forward, we have to be able to both explain and defend line-item charges.  Just tacking on $15 to every service invoice is not strategic.

It’s always best to first establish the fuel allowance that is already “booked in” to your current rate.  If you are going to enact a fuel surcharge now…what was the “triggering event”.

Example:

Our hourly rate includes a fuel allowance of up to .30 per mile.  Fuel costs in excess of .30 per mile will be billed to the customer based on:

• Actual miles traveled
• Distance from the dealership
• Zone

If costs are reduced below the .30 per mile threshold, all fuel surcharges will be discontinued.

This type of policy is scalable, defendable, and transparent.  There is a point where it starts, and a point where it stops.  The “included fuel allowance” can be adjusted once a year.  Most importantly, the customer will always know what the triggering event will be.

In an inflationary environment, we must be nimble, and we must communicate effectively.  Having policies in place that are logical, relevant, and flexible will help us retain our customers even in the work conditions.

About the Author:

Dave Baiocchi is the president of Resonant Dealer Services LLC.  He has spent 40 years in the equipment business as a sales manager, aftermarket director, and dealer principal.  Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance.  E-mail [email protected] to contact Dave.