Making Money on Service Packages

Nov. 30, 2017
A guide to pricing service package items for maximum profit.

Matt Sederstrom genuinely loves oil changes. That affection is uncommon for a shop owner. Instead, industry consultant Gary Gunn says the opposite is too often true. Competing on price, discounting and offering free services has led many shop owners to believe it’s virtually impossible to consistently make money on service packages, Gunn says. In addition, the minimal parts, quick turn-around and use of low-level technicians can quickly add up to poor margins.

“So many times, we lose consciousness when we’re pricing something,” he says. “We’ve lost track of what we’re really trying to do.

As the owner of four Honest-1 Auto Care locations in the metro Minneapolis area, Sederstrom has not only found a sweet spot with selling service packages, he’s also found a formula that renders them profitable with a consistent 66–75 percent gross profit margin.

“I’m a simple person when it comes to trying new things,” he says. “I want something that’s trainable and that everyone can hopefully get on board with and carry out.”

Gunn and Sederstrom outline the biggest keys to effectively pricing and making money on service packages. 

How to Create a Service Package

Sederstrom says that his first goal is to create standard service packages for his shop.

“I want to set it up like you’re at McDonald’s. Each cheeseburger gets one patty, one slice of cheese, two pickles, ketchup and mustard,” he explains. 

“It’s no different than McDonald’s. If you want a double cheeseburger with bacon, mayo and lettuce, we’re going to charge you for that.”
—Matt Sederstrom, Honest-1 Auto Care

At his shops, those standard menu-board pricing packages include two- and four-wheel alignments, transmission flushes, oil changes and tire mount and balances.

Sederstrom says he defines service packages as services that “most every car needs,” and sets up a standard time and amount for all of the packages. For example, an oil change is defined as a five-quart, synthetic blend, spin-on filter oil change, and a transmission flush as a 12-quart flush without filter. He says that the first step toward grouping items together is defining what that standard service will look like, and charging additionally for any job that does not fit the standard criteria.

“The thing that gets to be a challenge is that every car is different,” he says. “We see what’s normal and define our baseline. Anything additional, we need to charge for that. It’s no different than McDonald’s. If you want a double cheeseburger with bacon, mayo and lettuce, we’re going to charge you for that.”

Doing so, he says, will ensure that the margins remain consistent and you don’t lose money spending more time on a job than anticipated. 

Gunn recommends creating bundles, which could be a few services sold together. For example, he recommends creating a “complete fluid exchange,” which includes an oil change, radiators, brake fluid flush and rear end flush all for one price.

“We like to buy bundles,” he says. “People are used to packages. It signifies value to the consumer. It gives them a value package and it brings the customer back.”

A Formula for Pricing Correctly

Next, Sederstrom says the key is to also price those service packages at a standard rate. A standard rate means that pricing correctly is of even more importance to avoid losing money. 

Sederstrom says that he starts by looking at the pricing of neighboring shops—but not to set his own prices on services. Instead, he uses those figures as a gauge for how his shop might need to brand, sell or package the more pricey service offerings.

“Everyone is promoting their prices, so it’s not difficult to find out,” he says. “We’re not afraid of charging higher than what our neighbors are charging because we don’t want to get to the point where we’re selling ourselves broke.”

Sederstrom’s process is based on tangible numbers. He begins by figuring in the cost of parts and materials, and the technicians pay into the cost of completing the work. When it comes to charging for labor, Gunn says not to determine the technician labor hours based off the standard labor guides. He says that the labor guide is often outdated when it comes to service packages and it can sometimes take more time to do simple jobs than book time allows for. 

Instead, create your own labor guide based on the highest paid technician in your shop. Start by establishing how long—in tenths of an hour—it will take the technician to complete the service, then look for a certain gross profit on labor. Gunn says the goal then is for the technician to beat the labor rate of the traditional labor guide 25 percent of the time. 

The labor charge sets the foundation for the entire pricing structure for the job. Once that is determined for each service package, you can then factor in the quantity and cost of materials, as well as the markup percentage. Even though the goal is to create a standardized price, Sederstrom says to make sure the amount of fluids, for example, match the car at hand. 

“A Chevy Equinox versus a Dodge diesel truck is going to have a different sized transmission,” he says. “You’re not going to need as much fluid for an Equinox.”

Finally, when everything is accounted for (cost of materials, labor rate paid to the technician and labor rate charged to customer), Gunn says to make sure you’ve created a 66-75 percent margin on that total figure. 

Sedestrom says that keeping strict menu pricing on these packages is especially important to maintaining those margins. When employees get away from the set package price, he says, the margins are not met. To get employees to understand the importance of making the margins on service packages, Sederstrom has the staff at each of his four locations fill out a daily sheet that includes revenue, parts and labor, gross profit dollars and gross profit percentage.

“We have a profit and loss every single day,” he says. “It keeps the technicians engaged. I have my guys call me and let me know why it was below 60 percent one day or why it was above 75 percent. We want everyone to have that ownership.”

How to Carry out Service Packages

Gunn says that to set yourself apart and avoid competing on price, shops need to brand the identity of their service package. 

“You need something that would brand it so you can then package a list of services inside of that. That differentiates your shop from the others.” he says. 

Sedestrom says that he often puts together seasons-based marketing, which keep customers on a maintenance schedule. He notes that appealing to the customer is vital to making sure they follow through with the service.

“You can’t just go out and say, timing belt replacement. Only people who read the owner’s manual, which is probably 10 percent of the population, would know that they need that. It needs to be more simplistic.”

Gunn says that customers want to find value in the service packages they purchase, rather than just see it as a commodity. You need to make the customer believe that no one else can compare to your service.

“When you hear the name Hilton, do you think you’re going to get a room for $49 a night?” Gunn asks. “If you hear Motel 6, you think you’re getting a cheaper hotel. You can see how the brand identity impacts value.”

Sederstrom is a fan of the show-and-tell model. He frequently brings customers back into the shop floor to look at their car and has the technician walk the customer through the services needed and the price.

“I want people engaged in the process of maintaining their car,” he says. “We’re not going to hide anything. I want to retain customers so I’m going to be open with them. In most cases, people understand.” 

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