Covering Your Dealerships Increasing CostsSaturday, June 1, 2013
No this is not another article that talks about profitability. I will not explain how to raise all of your prices and achieve profit from your dealerships profit centers. If it was that easy then this topic would not be so interesting. If you run a business in today’s environment a week does not pass where you consider raising your prices and weigh its impact against its effect on total sales. The truth is that in every market during every cycle there is at least one competitor who is trying to buy market share be it in new truck sales, service or even rental business. The purpose of this article is not to solve all of your dealerships pricing issues but rather to discuss this important issue and attempt to provide thoughtful information.
To begin, never try to focus your pricing efforts on the dealership that is clearly under pricing to buy market share. At our dealership we try to analyze the customer’s application and determine if it makes good business sense to discount in one area such as PMs in order to capture the profit in other areas. Often, there is no justification and we explain to the customer that we provide a quality product and service that requires a certain rate. Profitability should not be a dirty word. Sure you may say that you cannot lose an account and that it would be better to have the account at a lower price than to lose it entirely. I would argue that you would sometimes be better off staying home than to use the companies resources and not cover the costs. No business can survive on that strategy. The other problem is that information is missing at the time these pricing decisions are made. Let’s list all of the costs that are increasing annually to better frame this discussion.
Wages must rise as the cost of living increases each year, business insurance, utilities, worker’s compensation insurance, hospitalization insurance, and we must not forget the cost of fuel. These are the costs that haunt us all. Now let’s list the basic areas where prices can rise: standard labor rate, flat rates for PMs, parts pricing, freight rates, new/used truck prices and fuel surcharges. Some of these areas are very straight forward and some may not be so clear.
Fuel surcharges must exist with today’s rising fuel costs. However, some dealerships look at this as another profit center. For road repairs some dealerships fuel surcharges are outrageous. Some have a standard flat rate wherever the customer is located. This causes problems with customer’s that are close by with minimal travel time. A fair fuel surcharge is based on different zones and can be explained by mileage x fuel price difference factor. The purpose is to cover the spread – not the entire fuel cost. Customer’s will always call to question new charges – if you have a fair answer as to how you arrive at the charge it will be more commonly accepted. If you say, “We needed to increase our sales so we decided to pick a $10.00 surcharge across the board,” the customer will surely be upset. In summary, fuel prices have varied by $.50 to $1.00 over the past year – if you have increased your fuel surcharge four times in the last year you need a new system of calculation. If you currently are not charging a surcharge you should quickly reconsider.
Dealerships understand how to raise standard labor rates. We also understand how to raise the standard rate and discount it the next day for a large user – this is part of the business. The interesting part is how often do you raise your contracted PM service flat rate labor charges. Do you have PM contracts in place where the agreement was signed eight to ten years ago at a competitive rate back then? If so, the time has come to sit down with the customer face to face and re-negotiate a PM contract. Fair is fair and the PM contract does not state that the labor rate is lock indefinitely. Don’t take the lazy way out and raise it without the customer’s notification. Send out a salesperson to communicate it properly and re-negotiate.
Another great question – do you know what your parts department’s standard markup is on all of the different parts sold (not just your product line)? Investigation may provide answers that are shocking. The common parts answer is “I can’t raise that markup – I don’t want to lose the business.” By simply increasing % markups for different parts groups you will increase the profitability of the parts department. Remind the parts person that most customers will not notice a difference of one or two percent.
Finally, we all figure a dealer prep cost into the cost of a new forklift truck. We also all complain about how there is very little profit in new equipment deals. You should consider the costs associated with the installation and prep and see if the dealer prep charge covers the time under your current labor rate. Also, ask your business insurance representative what the insurance cost is per $1,000 of equipment sold – you may not like the answer.
Generally speaking, our very competitive industry makes pricing power seem non-existent. Pricing theory would explain that as companies go out-of-business prices will rise. The question to ask yourself is – what side of that theory do you want to be a part of? What was the invoice amount from the last HVAC service call you made to your company? Our industry needs to learn from these others who have it right.
If you have any questions regarding this article or any other Tech Talk article please feel free to give me a call @ 877/303-LIFT (5438). As always, stay tuned to future helpful Tech Talk articles!