What Is Effective Labor Rate And How Do You Calculate It?
Effective labor rate is the true amount of value your techs deliver per hour of labor. It's different from posted labor rate in a simple but pivotal way. While the posted labor rate is how much you charge your customers per hour of work, effective labor rate is a more direct reflection of how much money your technicians really generate for the business per hour.
To calculate the effective labor rate, you simply divide your labor income by the total hours it took to earn that money. Your service department may have a posted labor rate of $100 per hour, but if the department earned $8,500 over 100 hours, the effective labor rate would only be $85.
The opportunity for optimization is clear: You want to get your effective labor rate as close to the posted labor rate as you can.
If your organization cares about boosting the effective labor rate and has the means to do it, you can turn that into a competitive advantage.
Working with effective labor rate data is an important consideration when you're taking a more careful and hands-on approach to optimizing the profitability of the service drive. With that said, not every dealership has embraced this level of focus. This provides an opportunity: If your organization cares about boosting the effective labor rate and has the means to do it, you can turn that into a competitive advantage.
How Can You Use Effective Labor Rate Data to Improve Fixed Ops Performance?
When you commit to calculating the effective labor rate and using it to optimize factors like pricing structure and technician performance, you're well positioned to get the most out of your service department. The general concept of using the service drive as a source of consistent, reliable income is common, and taking a scientific and data-driven approach to service optimization takes it to the next level.
The factors preventing your service personnel from delivering an optimal effective labor rate can be subtle and hard to detect. This is especially true if your dealership hasn't taken a technology-driven approach to managing the service department. Without ways to track data and patterns of technician efficiency and performance, a service manager won't have full visibility into what's causing their departmental earnings to erode.
So, when these departments do have technology platforms in place to track more precise metrics, what do they discover? Some of the issues may include:
- Unoptimized pricing: Setting an ideal posted labor rate is a challenge in itself. Dealers need to maximize their earnings per labor hour without setting a price so high it will harm the customer experience.
- Price compliance: In some cases, technicians and other service personnel aren't charging according to the department's price structure. In these cases, the effective labor rate will naturally sink well below the posted labor rate.
- Warranty filing inconsistencies: Dealerships that don't have a consistent system for filing parts and warranties may be missing out on revenue opportunities.
- The complexities of work mix: Optimizing prices for all a dealership's various services adds on complexity, and it's easy to lose money when there's no data-based way to account for productivity across offerings.
Data is the lifeblood of modern businesses across any industry. Dealerships in general and fixed ops specifically don't always receive this level of care and oversight, but when they do, it's possible to tackle specific revenue issues directly. Your dealership will be able to boost its effective labor rate and have the ability to observe the improvement in a clear way.
When using technology as a central part of effective rate optimization, it's important to select platforms and systems designed with dealers in mind.
What Does A Data-Driven Approach To Fixed Ops Look Like?
A sales manager would never operate without reliable analytics software, and the same data-driven approach should be applied to the Fixed Ops side of the business. A service manager with access to data-based insights can start shaping their leadership style around the information. The data becomes the direct line between the tangible work being performed by technicians and the decision-making, driving everything from pricing strategy to individual mentorship and direction.
Having access to accurate and up-to-date effective labor rate data delivers a new level of accountability to the service department.
Even if the number isn't close to optimal at first, visibility is still a good thing: Knowing how far the team has to go to reach stronger profitability allows leaders to make effective choices.
Technology is part of the equation, but so are the best practices around integrating the tech into processes and workflows.
Taking this new, data-driven approach to service department leadership is a two-part process. Technology is part of the equation, but so are the best practices around integrating the tech into processes and workflows. Specifically, these elements break down as follows:
- The technology should be specifically tailored, not just to the automotive sector, but to fixed ops performance management. Service leaders need an equivalent of the StoneEagle and vAuto systems that drives variable ops departments.
- The best practices are all about turning the digital data into tangible results. A consulting engagement with the fixed ops experts from JM&A Group allows dealerships to find the ways to boost their effective labor rates over time, learning from their tech tools.
All parties benefit from this kind of optimization. The service department gets better profitability from its offerings, the dealership as a whole takes on more revenue and the customer receives reliable assistance at a price calculated to be fair.
Get your personalized plan from JM&A Group, and see just how far your service department can go.