Probably one of the most misused members of the technician team in many shops is the diagnostic technician. I am talking about the highly skilled, highly experienced guy or gal who is, or should be, our diagnostic technician because of his or her sheer knowledge, broad experience and strong diagnostic ability. This individual is worth their weight in gold, though far too often we sell their services very similar to the way we sell and advertise a $15 oil change. Diagnostics in today’s environment are tough; require a very special skill set and temperament, but far too often, we discount or give these services away, missing huge opportunities for sales, profits and believe it or not, customer good will.
The selling of diagnostic time is one of the most misapplied, mismanaged activities out there. By description, diagnostics are undefined and open ended, and therefore need to be managed very carefully, assuring that they are thorough and complete for the customer’s sake, well managed for our technician’s sake and profitable for the sake of our shop. Most of us shudder at the prospect of a tough diagnostic job because, by its very nature, the outcome is unclear. Rather than doubling the pain by making the undertaking unprofitable, we need to strive to make it an important and very profitable part of our business. A great first step in this is to stop giving it away!
<<A great second step would be to stop doing free estimates on work that has the potential to involve diagnostics. Giving a free estimate on a brake squeak or tire vibration is one thing, but doing so on diagnostic work is asking for trouble. You cannot always know what repairs will involve diagnostics but being alert to the possibility is very important. As soon as we know, our customer needs to know.
When we give diagnostic time away, or sell it cheaply, we are saying to the customer that the most difficult, demanding and intense service we provide has little or no value. On top of that, we are taking a service that is, in most cases, performed by our most knowledgeable, experienced and highest paid technician and turning it into a money loser. Competence and technical ability are of a far greater value than that $15 oil change, and our customers know and appreciate this, even if we don’t.
Rather than apologizing for diagnostics, I am going to suggest we start bragging about it. Rather than discounting it, I am going to suggest we institute an elevated diagnostic rate that is at least 25 percent higher than our floor rate. Rather than tiptoeing around it and selling a single hour, I am going to tell you to have a consult with any diagnostic customers. Let them know that major surgery may be required; we won’t know what it is or what it will cost until we get in there. We have our best technician on it; and we will let them know what we find. Most customers will appreciate this approach — a few will not.
If we cannot do diagnostics profitably, we should not do them at all. The bottom line is that the very second we start talking about diagnostics, we are talking about something out of the ordinary. Our customers know this and though they are worried because we are asking for their permission to dive in on something that may or may not be expensive, they need their car, they understand the urgency and we are (or should be) the expert.
Many of us agonize over setting our hourly labor rates. Through our inefficiency and our tendency to discount and write poor or incomplete estimates, we often make this exercise meaningless as our effective labor rate declines and labor profits fall below where they should be. This is particularly true if we are offering free estimates on diagnostic work, and is amplified if we are discounting the labor we would charge on these complex services. If we pay our diagnostic tech for two hours and charge our customer for one hour, our effective labor rate is about half of what it should be. Our ability to maintain an effective labor rate at or very near our actual hourly rate will go a long way toward ensuring the profitability of our diagnostic services and our labor operation as a whole.
Effective labor rate has nothing to do with tech productivity; more correctly, it is a way of measuring how well we convert the labor hours we are selling into actual labor sales dollars. If we have a diagnostic labor rate of $125 and we sell two hours of diagnostic labor, we should generate $250 in diagnostic labor sales. Effective labor rate is entirely a measurement of our ability to protect the integrity of that hourly rate.
In the example below, we compare two transactions that include two hours of diagnostic time; the first using the existing floor rate of $100 per hour with a 25 percent discount for the customer; the second using the elevated diagnostic rate of $125 per hour with no discount. We are paying the technician $30 per flat rate hour.
Using our floor rate of $100 and giving our customer a 25 percent discount, our gross profit percentage on those two hours of diagnostic labor is 60 percent, and our gross profit ($) is $90. Our effective labor rate is only $75. With the elevated diagnostic rate we described above and our being disciplined enough not to discount our diagnostic labor cost to the customer, our gross profit percentage is 76 percent, our gross profit is $190 and our effective labor rate is $125. Quite a big difference, wouldn’t you say? Diagnostics are tough enough, but if we are discounting that diagnostic labor and driving down our profits and effective labor rate, they might not be worth doing at all.
In putting together a diagnostic rate, we strive to have a number that is competitive in our market area but more importantly, at a level that will support the compensation plan we have in place and produce reasonable profits for the diagnostic work we are doing. If we are consistently missing this mark, we are consistently missing out on sales and profit dollars that allow us to prosper and grow. This tends to be doubly true for diagnostic time.
The solution will likely require adjustments at both ends — an hour labor paid to the tech for an hour labor charged to the customer. My strong recommendation would be to review what goes into each of these diagnostic services and adjust them so that we can be competitive (not the cheapest and not the most expensive in our market area) and profitable! Effective labor rate is critically important in assuring that our labor operation is yielding the sales and profits we had anticipated in setting that hourly rate. The viability of our business demands that we are paid adequately for the labor hours we are selling, and that we are getting an appropriate return. That hour of diagnostic time sold needs to pay an hour and match the hour we are paying our technician.
A great diagnostic technician is a huge asset to our business. He or she is a very different beast than that motivated (or unmotivated) B tech, with a different approach and a very different perspective. Make them a valued member of our team. Pay them for excellence. Market them and market their services, but be profitable in that effort.
Everybody changes oil and does brakes. Only a few among us can perform open-heart surgery (diagnostics), and I promise you, it isn’t cheap. Rather than being a money-losing afterthought, diagnostics needs to be central to our marketing and broad strategic plan.
Price is what we pay, value is what we get. Diagnostics and a great diagnostic tech can bring great value to our operation, but only if we are charging adequately for this critical and valuable service.
