Managing Effective Labor Rate

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Service Insight

Gary Daniel has made a career out of his drive for constant improvement. Beginning his climb up the ranks in fixed operations at 18 years old, Daniel has played many roles within the industry and is now the general manager at Chris Collins Inc., a consulting firm based in Los Angeles.

One thing of which he has always stressed the importance? Effective labor rate.

“Effective labor rate is everything. That’s where everything begins,” Daniel notes. “It all starts with truly understanding your rate and calculating it very closely.”

Effective labor rate is a calculation that shows what a service department makes as profit per billed hour.     

For example, say your labor rate is $100 per hour and your monthly sales were $70,000 with four technicians working full time for the month at a total of 800 labor hours. If you had a perfect rate, you should have made $80,000 in labor sales that month. Because you made $70,000, your effective labor rate is $87 instead of $100.

Though basic, Daniel explains that this can be a difficult concept around which to wrap your arms.

“Effective labor rate is a term that most know,” he says. “People like to say they pay attention to it, but the truth, from my experience, is they don’t and they’re underperforming.”

To increase profitability and run a successful service department, you must calculate your effective labor rate often and analyze what can be done in terms of improvement.


Be mindful when giving out discounts.

Michael Larkum of ConSept LLC, a consulting firm in Virginia, explains that a major step toward improvement is to make sure that all discounts given out are intentional.

“Make sure that there’s not unauthorized discounting going on,” Larkum says. “That’s absolutely step one.”

Offering discounts can be great for gaining new customers. However, being too loose on pricing can be detrimental to maintaining an effective labor rate.

“The best stores I work with have password-protected discounting at the service desk,” Larkum explains. “If you have good management and good advisors, simply having scripts in place to explain that you’re competitively priced and there’s no need for a discount, will take care of 90 percent of the issues.”

Always keep an eye on your effective labor rate.

Though there is some debate on whether there’s a sweet spot to how regularly you should calculate your effective labor rate. Collins believes the more often you do it, the better. Especially when making initial efforts toward improvement, it’s best to monitor your rate daily, or even hourly.

“Make sure that you’re looking at it every day,” Daniel says, “If you see it dip, then you have to have tools in your toolbox to figure out why that happened.”

The key is to focus on smaller, tangible steps to keep in that toolbox. It’s often the little things that add up to success.

Develop an intentional pricing strategy.

One major mistake that’s made by many service departments is setting door rates and hoping for the best. It’s important to take time to develop a well thought-out pricing plan. Things to keep in mind while developing your strategy? Costs of operation, market demand, response to area competition and your specific profit goals.

“Dealerships are notorious for thinking that they need to be overly competitive with their pricing and it’s simply not true,” Larkum says. “They have a public perception of being overpriced, when, in fact, they’re usually underpriced.”

Hold your team accountable.

Both Daniel and Larkum agree that to truly improve effective labor rate, your internal operations need to be in sync. To maximize profitability, you must take time to thoroughly train all of your employees—advisors, technicians and dispatchers—on service pricing and quoting.

When it comes to training staff and technicians, Daniel stresses the importance of encouraging a consistent and positive mindset.

“Everybody from the top down has to have a value-driven mindset,” he says. “It’s the only thing that will separate you from your competition.”

Good training builds value, which will keep your department away from discounts and keep it moving toward a higher effective labor rate.

Use games and incentives to motivate your staff.

Working hard to improve an effective labor rate can be exhausting.

“You’ll want to inject some fun,” Daniel explains. “You’ll want to make sure you add an element of enjoyment in there, because when you go through this process, you’re going to burn your people out.”

After setting new prices and training employees on the new processes, set up competitive games or incentives to staff.

Daniel says that he makes use out of nerf guns often, having the staff shoot them at Jenga towers as a fun competition. He also switches it up sometimes and the staff plays blackjack during breaks.

“Maybe they get a point or a prize, maybe it’s $5,” Daniel notes. “You can switch it up and use whatever you want as an incentive.”


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