The debate of what the Sales Department should pay for repairs and maintenance on vehicles they want to retail continues year after year. We encourage Dealerships to charge most of the used vehicle internal work at a Retail Labor Rate, understanding that the cost of the work will be passed on to the vehicle Customer and the Dealership ultimately will make more profit, since the Sales Department typically sells from cost on Used Vehicles.
However, there are still Dealerships whose Internal Labor Rate is 50% – 60% of the Retail Labor Rate and deeply discount the parts. To those Dealerships, I pose the following:
What if: You’re the Used Vehicle Manager and every week you bring in a beautiful trade at a great price and you expect to make $2,000 on it, plus finance income. Now you’re told to sell it to an employee for $500 over cost. (Even if the employee has plans to retail the vehicle.) If this happens every week, the $104,000 Gross Profit you would have made for the year is now $26,000. How happy will you be?
Although the numbers may be larger in this example (and maybe not), the effect is the same when the Sales Department “asks” the other departments to discount their efforts.
The Service Department, the Body Shop and the Parts Department could be selling their work at a higher rate to retail Customers than at a discounted internal rate. For Service and Body, there is no replenishing the time sold – once it’s sold at a discounted rate, there’s no chance of selling it at a higher rate. The time the Parts Counter People spend tracking down the parts the Parts Department doesn’t stock could be spent providing excellent service to the Departments and Customers who pay a higher mark-up percentage.
As any Service Manager or Body Shop Manager can tell you, finding Technicians is a challenge; just like finding beautiful used vehicles at bargain prices. The effort to find, hire, train and coach Technicians is valuable, just like the time spent by Sales Managers finding, appraising, preparing a vehicle, then ultimately working a deal to get the best price.
If the Labor Rate for Service work was only worth 60% of the Retail Labor rate, you can be sure that the Factory would pay claims at that Labor Rate. If a parts Markup of 20% made sense, then the Factory would pay no more. I’ve run the analysis many times, for numerous Dealerships, and a 25% Markup on parts will allow the Parts Department to break-even. There is little pride or sense in breaking even.
There will be times when the Service, Parts and the Body Shop will need to help the Sales Department with a discount, we call them “Mulligans,” but it shouldn’t be an everyday occurrence. Maintenance work should be done at the same price as Customer Pay – not more than the Customer Pay work. If there is a “special” or coupon price, then that is what the Sales Department should pay. If you retail pre-owned vehicles over 7 years old, a discounted labor rate and reduced parts markup is worthy of discussion. But in return the Sales Department should make the effort to introduce the Sales Customers to the Service Department, instead of worrying that the Customer might actually return to the Dealership.
The Sales Department should be part of the Team and not send work outside the Dealership because “they can get it done so much cheaper.” This is a disservice to all involved, including the Customer if something on the vehicle fails because work was done by the cheapest guy in the block.
The Service Department should be part of the Team and earn the right to charge the retail labor rate, by providing excellent service and not putting the used vehicles at the end of the line. If it takes a week to get a car through reconditioning, then I can’t fault the Sales Department for demanding a discount.
There are a lot of challenges and debates when running a Dealership and its departments; let’s not make the Internal markup be one of them.