Out of the Crisis.Org

[Louis Altazan]

Competing with bass ackwards pricing

I have often felt pricing in the auto repair trade is what I refer to as bass ackwards. For instance, most services start with the price. Most often this is the price others charge or what is felt, the amount the market will bear. If this price results in loss the shop either attempts to cut the content or accepts the loss.

There may be a misguided notion that loss leaders will bring in more work and thus the loss is acceptable. In effect they cause other prices to rise to cover the loss. Cutting the quality of the service is another method of trying to reduce the loss. The net effect is a job people do not see value in, even when offered at a loss, and for good reason.

I feel this bass ackwards approach is the source of most pricing in the trade. No one seems to question if the price makes sense. Cost or anything else is given little consideration. Even the service rate established by most shops is simply based on what others charge. Independent shops feel they must be less than dealerships and set their rate as such. Dealerships feel they cannot be too much higher than independents and set their rates accordingly. Is the rate too high, too low, who knows?

Very few consider what it cost to offer the service or make the needed profit. Rather, once the price is established, corners or generally cut to try to make the needed profit. There may well be a market that is based only on price. There is also a market that realizes price and cost are not the same and wants the overall lowest cost.

The concept of “cost based pricing” is simply common sense, but has all be faded from the market place. With cost based pricing, we start with our cost, add the profit necessary to stay in business and divide by the hours available for sale. This produces a rate that covers cost and provides the profit needed. It also gives us a very important diagnostic feature.

By diagnostic feature, I mean if the service rate thus derived is out of line with the market there are three choices.

• Increase the perception of value for the service so that clients feel the price is justified.
  
• Reduce the cost of producing the service until the price is in line.
  
• Discontinue the service as non-profitable.

In practice there is normally a combination of the three approaches. So how does this differ from the “start with price” approach? Simple, it quickly tells us if our concept is viable [has value,] demonstrates the need to reduce cost and allows you to determine which services need to go to your competitors [no, we do not have to operate at a loss to keep clients.]

With this approach, and billing for the time spent, our prices will always be the best we can offer. The client gets a good deal and the shop makes a fair profit. We also allow our competitors to perform services below cost. Basically, we will have the lower price on things at which we are best and our competitors will have the lower price on things where they loose money.

“Never interrupt a competitor that is making a mistake.”

_________________
Louis Altazan
Owner/Manager AGCO Automotive Corporation
Baton Rouge, LA

[Dave]

[Bud]

This is odd. Didn't I write a post exposing the myths about Loss Leaders? It doesn't show up in the archives here.

[Louis Altazan]

Hi Dave,

[Louis Altazan]