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Do You Know the Fourth Type of Labor?

We sell four different types of labor:

  1. Competitive – that would be your oil changes; things that drive traffic, get people in the door…
  2. Maintenance
  3. Repair

The fourth one, you probably aren’t using correctly. Maybe you don’t even know about it. And that would be…

Drumroll, please…

Diagnostic labor, or diagnostic services.

This one is really growing legs in the industry; not just in the independent, but in dealerships as well! Realistically, if you are a repair shop or a repair dealership and you get a lot of repairs, your technicians are doing diagnostic services all day long.

Now, here’s the challenge: when we’re generating the diagnostic labor, what are we not generating revenue-wise for the shop?

When your tech is performing the diagnostic service, there’s no parts labor generated with that repair. Independent shops sometimes struggle with fixing cars. When they get stumped, they send a car to the dealer for help. The dealer charges them for one hour of labor time to diagnose the car. That’s a hell of a bargain for an independent repair shop! Doesn’t matter if it’s $200 or whatever; typically what you’d do is you’d double it and pass the bill over to the customer. You still provided a service so you still gotta make a profit, right?

You gotta understand that you can’t take a loss on diagnosing cars. You can’t let a tech spend four or five hours figuring out somebody’s concern and not drive the right revenue. Price it like it’s a fourth labor type. When you add a 25-50% markup on your regular labor rate, what you’re capturing is the lost parts gross profit that you’re not generating during the diagnostic time.

Lastly, keep in mind that you still need to be competitive and drive traffic. You still need to believe in helping the customers! Do an initial assessment at no charge, pop the hood and look to see if rodents have been chewing on the insulation. What I’ve done before is check engine lights for free.

An even deeper issue we’re seeing today is that the customer can do research by going on YouTube or something and know exactly what part they need to replace.

But what they can’t do, is a term that Jeremy’s been using for the last 10 years– RCA, or Root Cause Analysis. It’s one thing to know what needs to replaced, but it’s another to know why. If there’s an underlying issue that’s causing a component to fail, it could cause other damage in the system and cost a customer more money. They can avoid that by paying to give a tech the proper time to do RCA and pinpoint isolation testing to find out what exactly failed and why.

That’s the kind of stuff that gets customers through the door.

Before we get to our questions, it’s time for another…

Terms You Should Know

Today it’s Hours per RO, or Hours per Repair Order.

This is the one that confuses service advisors all the time . So if you ask an advisor, “What is the formula for hours per RO?” they’ll say hours–

But it has nothing to do with hours… You have to have billed hours to calculate it in the first place.

It’s labor sales divided by your RO count divided by your effective labor rate. That gives you your hours per RO. Example: $20,000 in labor sales divided by 200 RO’s divided by $100 an hour effective labor rate, that averages one hour per RO.

The spirit behind it is more “What are you averaging per ticket?” than it is “How many hours?” A lot of shops will take their billed hours out of their management program and then divide that by the RO’s to calculate their hours per RO, but then they’re not looking at the profitability of it which is designed in the effective labor rate!

The thing is a lot of times you can go into a shop and their effective labor is really, really low.

I had a coaching call this week with one of our clients up in Nova Scotia, and we were looking at the effective labor rate. Out here on the west coast of the US, we’re at $135 to $150 or $200 an hour, no problem. They’re still at $83 an hour in the great white north. I look at some of the numbers and I’m like, “Okay, number one: we need to do a labor survey, because I feel like the labor rate’s a little low. Just my opinion.”

So what’s happening to the profitability of the store? It’s going down the drain!

If I think the labor rate’s low already and we’re getting 88% of what we should get on the effective rate, we’re practically giving money away!

It’s just a small calculation. When we’re estimating these tickets – to move that number up and realistically – customers don’t even notice the additional labor charge on a ticket. It’s not about fleecing or overcharging them, it’s about getting the shop fairly compensated for the labor we’re providing – which is a specialized skill and a specialized team! We have to protect that labor and you can’t do that if you’re giving money away.


“Chris, I know you’re a busy guy, but I need your advice. Recently, I got a huge uplift in warranty parts marked up from 40 over cost to 75.4%. To avoid blanket, massive, performance-free pay raises for all, I need to change advisors’ pay plans from off pure gross to something else. Haven’t changed in five years, low turnover, happy employees, customer retention, etc. Hate to do it, but perhaps customer pay ELR x .10 x labor hours + 10% customer pay part sales + a 10% CSI bonus. Any ideas that won’t have to be redone later?”

So here’s the thing…

Obviously, you’re not in our Service Manager University, because in there we give you a pay plan and teach you how to make one yourself. I think your idea is a bit off, because I pay advisors on parts and labor sales, not gross. If advisors don’t control gross and don’t hire techs, gross is just going to confuse them. There’s all kinds of issues that it causes.

Here’s how I would do it:

  1. 50% of their pay would be on parts and labor sales…
  2. 30% of their pay would be on CSI…
  3. And then I would have an ELR bonus and a customer pay bonus.

That would be the basis. If I were you, I would sign up for our OnDemand Training for only $250 a month. You can train your advisors, your techs, everybody, on pet the dog customer service training. And then there are our service manager universities where you can learn pay plans and how to hire techs. There’s so much good stuff in there, I wouldn’t even know where to start!

And another thing: change is uncomfortable for anything. If you have to rework the pay plan, think about it as an enhancement that’s going to help in the long term because obviously you don’t want to upset your entire crew and have people walk out.

It’s normal to be hesitant about changing things so I think the spirit of the question is good, but you still gotta get it right and I think that paying advisors based on sales is better. Do the numbers and make sure you project it out, but that’s just what I would do.

“Hi, Chris. Love what you’re doing. Just started watching your videos. I have worked at a BMW – Mini dealership in the UK for the last five years. Started off taking booking calls and currently a service advisor. Reading bits of your story, it sounds very familiar to mine. There are a few people in the department who do not like my style of advising. They feel I’m far too relaxed with customers for a premium brand and would like me to change my approach. Honestly, my approach gets results and I feel like it makes the customer experience easier and more personal for them as a whole. So my question for you is: what’s more important? Looking after the customer in a natural, impersonal way that comes easy for me, or conforming to dealer standards as this is what they’ve been doing for years?”

Wow, that’s a good question. I don’t know if we’ve ever shipped swag internationally before, but I want to see a picture of you in the Service Drive Revolution shirt and hat over in the UK!

One thing as an advisor is you’ve got to be coachable. I don’t know the whole vehicle story here, but I’m guessing that what they’re saying is maybe you’re taking too long with each customer. I would say there’s probably a happy medium – you should listen to what they want and still achieve what you’re good at, which is making friends and petting the dog, right? Maybe just reframe how you think about it and try to do both.

Someday, when you’re a manager, this’ll be a subject you’ll have to address so try not to just see it from the perspective of an advisor – try to understand what it is that they’re trying to accomplish and how you can accomplish it. Don’t lose your gift or what you’re good at (which is connecting with customers!), and still represent them since they’re giving you a paycheck and providing you with that opportunity.

I get it. You don’t want to be a robot spouting pre-programmed sweet talk. You should absolutely let your natural personality and style come out, but get with the culture of the business and what they’re trying to deliver to clients first! Then you can fine-tune it with your own personal style.

You’re a hybrid service advisor now, but you’ve got to think like a manager, too – think as a leader! Don’t take it too literally and try to understand the spirit of what they’re saying.

It also doesn’t hurt to ask specific behavioral questions:

  1. “What specifically did I do that you didn’t like?”
  2. “Did I use a slang word?”
  3. “Did I touch someone inappropriately?”

Well, hopefully not that last one. Then that’s a whole ‘nother issue…

Hope that gives you some food for thought and I hope everyone has a great week. Watch out for the Drive-By this Friday and see you next time on Service Drive Revolution!

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