Nation wide, OEM franchised service centers continue to loose hundreds of thousands of dollars worth of revenue everyday. Some service centers may be letting go as much revenue as they are generating, without even realizing the enormity of the loss.
Through our market research and with a substantial number of Repair Order Revenue Gap analyses carried out at local dealerships, a consistent picture has emerged. This picture is not pleasant and forebodes a very challenging and an uncertain future for all OEM franchised service centers. Especially when seen in comparison to what the competing “Aftermarket” industry has been able to achieve with the AAIA and Internet Parts Ordering (IPO) standards.
These challenges are not temporary; they are deeply mired in how the information technology has and continues to change the entire automotive landscape. Multiple online resources, accessible with a few clicks, have armed customers with real-time information. This is a game-changer!
As mentioned earlier, in most cases OEM franchised service centers are not only relinquishing an equal amount of revenue as they are capturing, but their inability to quantify these losses in terms of dollars and cents is also puzzling and problematic. We have coined this phenomenon Customer Pay Black H***. Customer Pay Black Hole’s existence is validated through a very fundamental question posed to every OEM franchised organization: how much of the potential customer pay business was actually NOT closed in your service center today?
For the most part the answer will be “I don’t know’ but on the other hand it is not so surprising. How can anyone possibly answer this question when there is no mechanism in place to assign a revenue benchmark to every customer/vehicle that may enter into a service center? We all know that a Customer Pay Black H*** exists for all OEM franchised service centers. Do we know the exact size of this Black H*** for each service center? Hardly!
Although the auto industry may speculate and hold a wide range of elements to be the contributing factors behind this Black Hole’s existence, in our expert view, this phenomenon occurs due to the following three fundamental reasons:
In the OEM franchised service center world, every customer whether driving a Ford Focus or an Eddie Bauer Expedition, is painted with the same pricing strategy brush. Lack of a deep insight into their own customer base forces these service centers to adopt a “one price fits all” formula. This in turn provides many customers with little or no incentive to continue a business relationship after their vehicles’ OEM warranties have expired.
For the most part service menu item prices are not designed on the basis of consumer group dynamics, vehicle differentiations, previous buying habits etc. They are also not devised with the knowledge of which service items are ‘sensitive’ items and which ones ‘blind’.
The customer base of a typical OEM franchised service center may contain customers from a wide variety of econometric or demographic background positions. However the maintenance packages, parts prices and labor rates offered to customers do not take any of the above factors into account, leading to several revenue opportunities not being better optimized. The concept of ‘Price Image’ is virtually foreign to this industry.
Another challenge facing the OEM franchised service center is their inability to identify service bay or service stall hours of operations as perishable inventory units. For instance if a typical service center flags on average of 1.25 labor hours for every actual hour per service stall and the effective labor rate is $75 per hour. One can deduce that the actual revenue value for every hour of operation for a service stall is $93.75. If not billed this opportunity is lost forever. The Auto service industry as a whole must understand, as the Hotel and the Airline Industry has, in order to grow revenues and profits, they must have a strategy in place to minimize the number of perishable inventory losses. Every OEM franchised service centers’ ultimate goal should be to keep service stalls occupied at all times within the desired profit expectations. This can only be accomplished through an insightful and a real-time Revenue Management solution.
To design such a solution of course is nearly impossible given the current levels of technological sophistication deployed in most OEM franchised service centers. A technological leap or a paradigm shift is required.
This paradigm shift is an immediate design and implementation of a technology solution that incorporates Revenue Management, Business Process Management and Customer Relations Management strategies under a one umbrella. Revenue Management solutions have been pioneered by the Hotel and the Airline industries and with great success. At the heart of this strategy lies a very fundamental question that every business with a substantial running expense should ask: how to price each offered item in order to maintain a constant stream of business without compromising profit margins?
The answer lies with Revenue Management. We believe technological solutions, similar to the ones implemented in the Hotel and or the Airline industries can be effectively customized and delivered to the OEM franchised service centers via a seamless multi-solution auto service platform. This platform must be in essence an end-to-end platform, must incorporate all phases of a customer fulfillment and follow-up process, and must be scalable as well as dynamic.
On the Revenue Management side, identifying for each service center their “Price Elasticity” figures should be the underlined objective for any solution to be effective here. “Price Elasticity” is defined as the percentage change in quantity demanded divided by the percentage change in price. In other words, at which individual optimum price level a customer is most likely to choose your shop for each one of her car care needs. This on-demand analysis coupled with an effective customer communications strategy at every OEM franchised service center should help capture a substantial amount of the lost revenue opportunity. It is also referred to as “Price and Revenue Optimization”.
However, the “Price Elasticity” or “Price and Revenue Optimization” concepts alone cannot achieve the level of total business optimization that is required to fulfill the value proposition. OEM franchised service centers are multidimensional structures in essence and ‘Value Add’ in one aspect of the business can lead to a ‘Value Loss’ in another. Therefore in order to achieve total business optimization, customized Business Process Management strategies must be a large part of any technology solution that portends to be the effective solution in overall scheme of things.
The ability to effectively process a large number of customer fulfillment orders is a pre-requisite to a successful implementation of any “Revenue and Price Optimization” strategy. In other words before we begin to go after the lost or potential demand opportunity we must first establish effective internal processes and benchmarks to achieve high levels of ‘Stakeholders Satisfaction’ and increased productivity.