Improve Profitability by Optimizing Your Labor Rates
During the busy season, it can feel impossible to stay on top of everything in your service department. However, if you can set the right labor rates, it can also be one of the most profitable parts of your OPE dealership. To help make sure your dealership is as profitable as possible, we asked Sara Hey for some tips and tricks for setting labor rates. Read the blog to hear what she had to say:
It can be overwhelming to make changes in your dealership during busy season, but optimizing your labor rates presents a huge opportunity that is too good to be passed up! Whether your dealership is running as smoothly as possible or whether you’re still looking for ways to reduce the chaos, you should be regularly reviewing your posted labor rates to make sure they’re contributing to your profits as much as possible.
Why Are Labor Rates Important?
Labor rates are important for two main reasons:
- Labor rates determine how much you can pay your technicians.
Given the wage of your technicians is 30% of your posted labor rate, your labor rate needs to be set at a wage that is fair to your employees, fair to your customers and still maintains your margin. For example, if your posted labor rate is $100/hour, you would be paying your A-level technician $30/hour. For a full breakdown of standard labor rate costs, click here.
- Service department profitability is second to none in importance.
Once you have streamlined your processes in order to make your service department more efficient, you need to be consistently and regularly reviewing your posted labor rate as a proper rate will continue to push your dealership towards higher profitability.
How Are Labor Rates Set?
Now that you know why labor rates are so important, you may be curious about best practices for how to set them. According to Sara Hey, a great place to start when setting your labor rates is the local auto dealerships. While you might think you need to specifically look at OPE labor rates, there’s two main reasons why it’s better to look at the auto industry.
First, if you try to reach out to another dealer in your network near you, they will inevitably reach out to another local dealer, and the chain will continue until it gets back to you. This phenomenon is known as pooling ignorance, and it will cause the labor rate to constantly stay the same.
The second reason is that a few years ago, Ford spent close to $20 million to determine what the labor rate should be in each part of the United States. While we may have to charge a slightly different rate, this will give you a great benchmark to work off of!
After you get a hold of the labor rate at that dealership, the rule of thumb is to take their labor rate and reduce it by 10%. You will need to verify that this rate makes sense for your area, given the price sensitivity of customers and the going rate for an A-level technician, but generally speaking this labor rate will be very competitive.
You may also need to consider increasing your labor rate as a talent acquisition strategy. With the inventory challenges and parts shortages that plagued the OPE industry the past few years, many dealers began focusing more heavily on service work orders to drive revenue. In an already competitive labor market, this makes it more difficult to compete for top service talent and means dealers may need to offer more competitive labor rates to attract the necessary talent. In this case, you may need to set your labor rate slightly higher than normal.
When Are They Rolled Out?
Given the current economic environment, most dealers are incrementally increasing their labor rate every 30, 60 or 90 days due to inflation. Now, this is if you’re looking to make small changes to avoid a difficult conversation. If you’re looking to make a bigger change, you should make it either at the beginning of busy season or in the middle, when people are more concerned about getting the repair in a timely manner than they are about how much it costs.
Want more expert tips from Sara on how to reduce chaos this busy season and improve profits at your dealership? Check out her vlog series: Improve Efficiency at Your Dealership This Busy Season!