Not long ago, I received a call from a rental property tenant informing me that his heater was out. Within minutes, I was on the phone with an HVAC repair center scheduling a service call. The lady on the other end politely reminded me they have a $65 minimum charge for diagnostic service.
Of course I was aware that there was a “minimum charge” for a service call. Maybe it was the fact that she made reference to the charge being related to their “diagnostic service” that tied me back to the aftermarket. But now I was struck with the concept that most consumers are probably used to a minimum charge for a service call. Yet, in our industry, many of our techs are afraid to institute a similar fee.
Don’t shoot with a scared stick
A college friend of mine named Rich would frequently say, “You can’t shoot pool with a scared stick.” Though he used the money he won to pay his tuition, the point is you won’t win many games (or make any money) if you’re afraid of losing.
But we’re so afraid of losing even one sale that we are dragging down the quality (and margin) of every sale. This industry is essentially shooting pool with a scared stick.
Almost universally, the rationalization for this behavior is attributed to competitive pressure. When talking with technicians about their rates, they routinely say that if the competitor down the street posts a rate of $65 per hour, they can’t post a higher rate. I contend that the consumer doesn’t pay much attention to the hourly rate but to the total cost of the repair.
The bigger issue seems to be that of the “advertised price.” The major retail chains have defined a price point they think the car owner is willing to pay, and they use these unrealistic prices as bait to get them interested and then sell up from there.
We’re all familiar with the $19.95 oil change or the $69 “complete” brake job. Corporate training departments build curriculums around the art of selling up, then corporate marketing departments build incentive programs around being successful at it. The typical independent tech is not comfortable with this selling tactic. As such, they are being boxed in by their service chain competition: forced to address the customer expectation of what the job should cost, but unequipped or unwilling to play the sell-up game.
Longing for a 1980s price sheet
Any pricing strategy practitioner will tell you the true discipline and art of pricing is to see how much — not how little — you can charge. The goal is to know that the consumer walked away feeling they received value for their money.
I suspect, though, that many consumers feel better after having paid more at a chain repair shop than those who paid less at an independent shop for the same service.
But it’s not just service. The aftermarket’s pricing of parts is borderline insane.
The price of chrome valve covers is less today than it was 15 years ago. Someone in the engine parts business told me he would gleefully go back to a 1980s price sheet, as it would mean a substantial price increase.
Think about that. Were the prices of raw materials higher in the 1980s? How about labor? Transportation?
There is a litany of causal factors that are driving this price/margin shrink. There have been positive process improvements in the areas of manufacturing and technology that have minimized the need for price increases (and perhaps even allowed for some decreases).
There is the downward pressure on pricing that came with the invasion of products from low-cost countries. But then there is the dark side — our own greediness: the lack of discipline among resellers who took price concessions and discounts to the street, greedy manufacturers that over-distribute their products and the misdirected notion that anyone can build a sustainable business model on discounting. But the proverbial boat anchor around the ankle of the aftermarket is manufacturer published pricing.
Working in a box
A WD told me he was getting squeezed beyond belief when it came to pricing. He said, “I am a prisoner to the aftermarket’s system of published pricing, and frankly I’m not sure what I can do.”
I asked what he meant by being a prisoner.
“I’m in a box. Most of my vendors claim they can’t get a price increase from their biggest customers or all they can get is a minimal increase. My margin is set as the percentage between WD net and blue. If all I get is a 2 or 3 percent bump, I can’t begin to address the increase in expenses that I have, like the increased cost of fuel.”
He is right. If his discount is 35 percent, he is making 35 cents on every dollar. If there is a 3 percent increase on a product line, his gross profit moves to just a little more than 36 cents on the dollar. That only results in a 1 percent increase in gross profit. It’s pretty hard to pay for a 20 or 30 percent fuel cost increase with one red cent.
So what can he do? A fundamental concept of pricing is the ability to work with a cost plus model where increases in cost translate into corresponding increases in prices. In the aftermarket, cost increases rarely result in pricing changes. Or the change lags so far behind that one can rarely draw a corollary between the two.
To be effective, pricing decisions should be made as close as possible (in both location and time) to places where products are sold. The best retailers have mechanisms to adjust and adapt on a market-by-market basis, if not store-by-store. When pricing decisions are being made in the supply chain two or three steps above where the conditions driving them are occurring, they will never be market responsive.
A second-class citizen approach
Someone told me that as an industry, we suffer from low self-esteem. And maybe he is right. It seems the aftermarket has always thought of itself as second-class, especially when compared to the OEs. And that attitude manifests itself into our pricing.
It has become “conventional wisdom” that the aftermarket never prices product above the OE dealership, but think about the wrap-around services we provide techs over and above the OE dealer. We provide training. We deliver parts literally on demand. We pay warranty claims.
We take them to the races. Extend credit. Help them with their business in myriad ways. Yet, the products we sell are not worth as much as the OEs?
Technicians exhibit similar low self-esteem. I routinely ask techs in focus groups if the quality of the service they perform is as good, equal to or better than the work done at dealerships.
Overwhelmingly, they say their work is equal to or better. Yet they charge 20 to 50 percent less for labor. When comparing their work to national service chains, nearly all independents say they are better.
So think about the position the tech puts himself in. He tries to meet the advertised pricing point of the national chains (one that they rarely sell at) and believes that he can’t charge the same rate as the dealership, even though the quality of his work is better than both.
I know that in today’s post-Enron, Sarbanes/Oxley environment, conversations about pricing make everyone nervous. But due to our own devices, we have been through a dozen or more years of negative growth in pricing. That must end. Growth that’s less than the rate of inflation is unacceptable. Every level of the aftermarket supply chain needs to be cognizant of the part we’ve played in propagating the degradation of pricing. We need to encourage one another to charge what we are worth. The goods and services we all provide are on par with anything available anywhere, so let’s just put away the “scared stick.”
