June 4, 2007 – Determining when labor rates should be increased

By Matt Bolch
Contributing writer
When was the last time you raised the labor rates in your service department?
“We were surprised at how few have raised their rates in the past year,” said Steve Jones, general manager at Gart Sutton & Associates Inc., who asked that question at a number of meetings put on by American Suzuki Motor Corp. to help boost dealers’ profitability in service departments.
“Fuel, power and shipping costs have gone up,” he said, “and it’s important to calculate your costs and determine what people are willing to pay for service.”
Many powersports dealerships barely break even or even lose money on the service department, partly because hourly rates are too low. A dealer with higher rates might have to do a better job of justifying the prices he charges, but good customer service and quality work will pay handsome dividends.
Before a dealer can raise rates, careful consideration must be given to local market conditions and competition in the marketplace. There’s a fine line between receiving fair compensation for work and price-gouging. While there’s nothing wrong with charging high rates, a dealer must offer superior service to justify the rate.
Jones mentions a personal watercraft dealer in the Dallas market who charges $110 an hour for labor, “and he is packed all the time because he marketed himself as an expert in the area,” Jones said. “He turns watercraft around fast and fixes them right the first time.”
In the past three years, Gatto Cycle Shop in the Pittsburgh suburb of Tarentum has raised its service rates from around $40 to the current rate of $67, says George Gatto, president of Gatto Cycle Shop. The dealer sells Harley-Davidson motorcycles in one location and imports in another store two blocks away, with a common service area for all lines.
“We’re a little bit profitable, but we were losing money before,” Gatto says of the service department. The dealership last raised rates in January 2006, and Gatto says he passed on an increase this year. A few years ago, Gatto says the margins were so good on Harley-Davidsons that making money on service took a back seat to the profit made from selling motorcycles. But with powersports sales flat or down across several segments, dealers must focus on core competencies, he notes.
Gatto Cycle began transforming its service department just after the dealership president went through performance consulting offered by Harley and was put in a 20 Group. Service department issues are a common theme at group meetings, Gatto said. “We are all struggling with it,” Gatto says of the service department. “We’re all at varying degrees of bad.”
Action Motor Sports raised its service rates $5 this year to $79 after foregoing an increase in 2006, says Darin Simonis, general manager of locations in Fairview and Gresham, Ore. “We try to gauge what’s happening in the market,” Simonis said. “The customer doesn’t see an increase of $4 or $5, but we’re usually the last in the market to raise rates because I don’t want to be the highest.”
Sloan’s Motorcycle and ATV Supercenter in Murfreesboro, Tenn., has held its labor rate steady at $75 for the past few years, says Curtis Sloan, executive vice president. “In reality, it’s a warranty rate,” Sloan said. “The vast majority of what we do is menu-driven, which reflects the competitiveness of our industry.”
The first step to setting a competitive rate is knowing what others in the area are charging for service. That includes not only other powersports dealers, but also automotive dealers.
“Our perspective is that it takes more effort and know-how to repair a powersports product than a car,” Jones said.
The second step is to revise your service fees regularly, factoring in such items as labor, overhead, fuel, shipping and other costs of doing business.
Finally, a dealer should expect to turn a profit on the service department, with fees high enough to more than cover expenses but not too high to justify. A dealer who has studied his dealership and market will have no problem justifying the rates he charges, Jones says.
“Part of the beauty of menu pricing is that it takes the customer’s focus off the labor rate,” he said. “All customers really want to know is how much (the service) will cost and when they can get it back. The focus should be on what the job is worth to consumers in this market.”
Some menu prices probably will be set below hourly rates — tire changes, for example — to reflect market conditions, but any movement toward menu pricing should help the dealership grow its service department.
Most dealers struggle with service department pricing, but Gatto says those who plan to stick around in the industry are addressing the issue head on.
“There still are guys out there charging $42-$45 an hour for service, which is crazy,” Gatto said. “These dealerships are dead, but they just don’t know it yet.”