Low price service today keeps the AA Away!

The birth of the £1 service is about to be reality. Service pricing is time bared in that you cannot make money from bays that were not filled yesterday. As a result service directors should look to other industries such as hotels and airlines who also operate in time sensitive markets and utilise their ideas on dynamic pricing. In this article, I’ll look at using dynamic pricing as a way of filling your service departments and some of the issues you need to address when looking at implementing a dynamic pricing policy.

Currently most franchise dealers cannot believe how well the market is performing and from the suicidal days of December 2009 they are having a surprisingly good time. However, in discussions with mystic Meg, there are storm clouds on the horizon for 2010/11 in a franchise dealers service department. On the basis that the bulk of a franchise dealers service work comes from vehicles between 1-3 years old (the industry operates on getting a retention of 70% of the 1-3 year parc) in 2010/11 there will be a significant shortfall of workshop work due to the dramatic reduction in new car sales over the last 12 months.

So, if the forecast is looking stormy, how do you address this problem and find new business?

The obvious answer is to start chasing the older fleet. However, there is a good reason why consumers leave franchise dealers after their vehicle goes out of warranty. This is primarily a perception that the main dealer service costs are too expensive. The challenge that franchise dealers face is to change this perception that they are expensive and they can learn valuable lessons from other industries on appropriate pricing policies.

The problem with servicing is that it’s a “distressed purchase”, i.e. customers begrudge having to pay to service their car especially if they cannot feel a return for their investment. Therefore, the nature of servicing is that people do not like to be shocked by large bills and they want value for money – neither of which they necessarily associate with franchise dealers. In the last ten years our perception of the airline and hotel industry has changed from seeing these as purely fixed price offerings to understanding that price changes dynamically depending on demand. Utilisation rates are critical to the profitability of the airline business and it is better to have someone on a low price who can be upsold than fly empty. With the introduction of sophisticated yield management tools and smart marketing, both hotels and airlines dynamically price their product to maximise their yields.

Dynamic pricing relies on having a strong understanding of the actual cost of production and then looking to create revenue increments to utilise capacity and maximise yield. In a service environment this already happens to a simple extent in that operations will have different prices depending on the type of customer – for instance a fleet customer will have a lower price per service compared to an irregular customer.

The steps to introducing dynamic pricing are to identify who your potential customers are so that they can me marketed to cleverly and then have a strong understanding of what price points will bring them into the dealership. The importance of segmentation cannot be underestimated because here one can pick up strong underlying revenue streams to cover the cost of servicing and then push towards profit and allow for the £1 deals. For instance one of our customers has a low cost deal with their local hospital and this covers 50% of their utilisation allowing them to maintain firm pricing with the rest of their offering because they know they have guaranteed business.

When deciding what prices to market to potential customers, this can be either be time or needs based

An example of time based would be advertising one services a day for £1 per day on a first come first served basis. However, at this price the cost is non refundable and the date cannot be changed (just like a basic airline ticket). These £1 services would also be similar to airline offerings in that this would only cover a certain cost of the service (i.e. the labour) and the rest of the cost (i.e. the materials) would be in the small print. The objective of the £1 service is to make the phone ring and book in the vehicles – upselling can come later. Note that the true cost to the garage will be made back in the margin they make on the parts that are put in for the service.

An example of a needs based offer would be a special price for vehicles over a certain age or rewarding loyalty by giving increasing discounts for each service they have with the company. The problem with reduced price servicing for older vehicles is that owners of younger vehicles begrudge paying more and this reinforces their belief that franchise dealers are expensive (ie they overcharge me to maintain a warranty). What better than to reward them with loyalty – we get no claims discounts for insurance why not service use discounts but they have to be taken at the garages rather than the customers convenience?

To really be successful with dynamic pricing, you need to make customers accept that the lower the price, the more constricted the offer will be – i.e. the difference between a fixed fare and a flexible fare. The advantage of this is that it will allow the garage to manage its bay utilisiation more effectively and therefore maximise its yields.

One of the keys to dynamic pricing in the service department is having a good understanding of what will attract consumers and being able to market to the segment accordingly. This requires having a decent database which can only be achieved by interacting with customers on a regular basis. This requires discipline and focus but creates a virtuous circle because marketing can be more targeted and focused which will create the dynamic pricing opportunities.

Once the database has been segmented the objective is to create compelling marketing offers that draw in the customers to book their services going forward. These offers should be be designed to make the phone ring – hence the £1 offer!

The challenge to moving towards a more dynamic pricing structure is controlling how staff use the offers and maing sure they understand the different prices that are being promoted. Hotels and airlines have created sophisticated yield management systems that provide the price points, will your dealerships have the ability to introduce the same disciplines and controls?

Whist you might be having a good time today in 2010/11 your service bays could start getting very quiet – due to the high operational gearing in your business and tight margins, have you modelled whether your business can survive this downturn? If following a ‘back of an envelope calculation’ the answer needs hiding from your bank manager then you need to act now to come up with suitable strategies to increase you older car service next year. Now is the time to act because your future of your dealership is all about service – your service quality and your service offering. So will 2010 be the year we see the £1 service?

Plan for keeping up service retention

  1. Review your franchise brands and the decline in year on year sales for new and nearly new vehicles. Apply a similar percentage reduction to your bay utilisation month on month to see what this does to your profitability – this will show you the potential problem you will have in 2010/11.
  2. Review your pricing strategy: a. Create a service plan where you are seen to share the risk b. Create a policy for dynamic pricing that is: Time Based Needs Based
  3. Review your contact strategy and database quality to segment your current and potential customers and create new opportunities
  4. Start to advertise your £1 service!

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