Grid pricing is a means of gaining relative improvement and recovering the loss of gross profit from the Dealer’s efforts to be competitive with the aftermarket’s maintenance pricing. Grid pricing originated in the 1980s when ATcon, in association with its Service Performance Groups, began to explore pricing as a means of gaining relative improvement.
ATcon studied labor amounts and developed equations to determine an effective rate that was financially sound and customer sensitive. This information was formatted as a cross-reference grid. Today, grid pricing has taken several forms. The optimum type of grid for a given use is dependent on factors such as location, competition and work mix. Each style contains equities and inequities.
General
Grid pricing was instituted in the 1980s when traditional pricing methods in dealership service departments failed to achieve the desired gross profit
retention. Created to compensate for lost gross profit, pricing structures also had to:
1. Be customer sensitive.
2. Create a comparative price environment, improving customer pay market penetration.
3. Be easy to use by the staff.
4. Include methods of controlling customer pay effective rate by management.
Base Pricing Methods
Seven base pricing methods have evolved in dealerships over the years, as described in The Seven Controllables of Service Department Profitability, by Ron W. Stoner and Forrest “Skip” Vanderwall:
1. Single Level Pricing —The first pricing method was a “single level” pricing structure. With this approach, all labor is invoiced at the same rate. One hourly rate is used
for all labor operations. There is no formal allowance for variance.
This pricing method was practical when labor rates were much lower than those of today. You could compete on the highly competitive services while
remaining competitive on repair type labor.
2. Single Level with Exceptions —This pricing method developed as labor rates increased. It became necessary to use exceptions, or deviations, from the stated labor rates to remain
competitive on the most visible services. This lowered the effective rate in the service department.
These are the services such as lube/oil/filter, tire balancing, and tire rotation and alignments. Customers were able to predetermine a value or price
through competitor advertising.
3. Bi-level Pricing —This pricing method was developed to compensate for the variations in certain types of labor pricing. Two different hourly rates are used.
Generally, a higher rate is used for repair work and another rate is used for lower priced maintenance.
4. Bi-level with Exceptions —This pricing approach allows for more than one labor rate to be used based on the complexity of the repair in combination with competitive exception
pricing. The concerns are similar to any situation where exceptions are allowed. Now, for perhaps the first time, a unique situation develops in the
industry in that the service advisor has a choice or judgment to make.
5. A-B-C-D Level Pricing —This pricing method has four or more separate and different hourly rates. The shop is set up with different technician skill levels and separate
labor rates. Pricing is based on skill levels required to perform the labor operation. Technicians are normally paid differing pay rates based on the
skill rating of the job performed. This becomes increasingly difficult to manage as the technical staff matures.
6. Multi-level Pricing —This pricing method normally uses different rates for competitive, maintenance and repair type work (known as “C”, “M” and “R” type labor,
respectively, as established by a repair order survey). The combined income of all the categories determines the overall customer pay effective rate.
7. Multi-level with Exceptions —This pricing method develops when three different rates are inadequate to compete in a given market. Exceptions are made for highly competitive
items. This can result in interesting situations when exceptions are allowed.
Service Advisor Considerations
The service advisor was given a “choice” for the first time with any method other than pure single level. Several questions developed as a result:
1. What rate is applicable for what job?
2. Do certain customers qualify for the reduced rate, and on what types of work?
3. In a spot situation, can I use either rate or any range in between?
Human nature is to follow the path of least resistance. So, unfortunately, the lowest possible rate is frequently chosen.
Service advisors were very reluctant to quote an exact price when comparison-shopping contacts were attempted. Customer estimates included terms such
as “around,” “about” and “somewhere between,” further evidencing the complexity of the repair pricing.
This also brought to the forefront an issue of effective rate tracking to ensure that the service advisor used proper pricing. New levels of
sophistication in terms of measurements and management were often required.
Management is now forced to consider how to administrate pricing policy and enforce pricing policy.
Methodologies
Each method used throughout the evolution of service labor pricing has advantages and disadvantages. The limitations inherent with some methods can
limit the customer pay market by virtue of image. Managing the pricing can become involved and time consuming.
A logical extension of methodologies used in the past had to be considered to provide options. There was a need to be competitive with the highly
visible maintenance items while positioning the repair pricing at greater effective rates.
A solution had to be found that would give service advisors a quick reference guide for pricing repair type labor. In addition, this guide had to
satisfy the demands of the business as a profit center and the demands of customer sensitivity.
A pricing grid format was established that featured quadrants of labor hours by each tenth (1/10) of an hour. A labor price was determined for each of
the cells in the quadrants.
The use of a pricing grid yielded consistent and comprehensive pricing for customers. The focus became the “job price,” not necessarily the rate per
hour. Much like a tax table, the pricing grid established the calculations of labor rate multiplied by the respective flat rate hour for use as a
pricing tool for the advisory staff. Since each tenth (1/10) of an hour had an established labor price, it was determined that this would provide a
consistent and predictable effective rate.
Matrix Type Pricing
Parts departments have used some form of matrix type pricing for years. It was determined that using a similar technique with labor pricing could have
increased benefits. A pricing grid in one form or another has been around for use with fixed rates as a quick reference multiplication table.
Incorporating the matrix philosophy of pricing led to the development of a Matrix Grid, where each of the cells had a mathematical different
escalator. The advanced format was developed where each coordinate on the grid stands independent of the others and is priced solely on its own
merit. Each coordinate has its own value and calculation based on the parameters of the matrix structure. Lesser hour operations had lesser labor
rate amounts corresponding to higher repair hours achieving higher established rates.
Grid Development
ATcon began by studying each labor amount to determine the frequency and visibility of the amount as it relates to a repair operation job price.
Equations were developed that provided a financially sound repair effective rate, yet remained customer sensitive. This was formatted as a
cross-reference grid for use on the service drive.
Pricing Grid Use
Grid pricing has been used to augment effective rate and potential gross profit increases in a customer-sensitive way. The pricing grid has been used
to offset increases in overall expenses and maintain acceptable gross profit when using competitive pricing on some operations.
As the business has grown and evolved, so have the expenses. The technical staff is no longer “mechanics”—they are truly technicians. The amount of
information required to diagnose a vehicle is overwhelming at times. Training and special tools required to perform specific tasks has increased.
Manufacturers in some cases require purchase of specialized equipment and tools to enable reimbursement of warranty repairs. The majority of these
tools and/or equipment are no longer inexpensive. The volume of work is sometimes such that the one dealership-provided tool is just not enough.
Technicians must sometimes make their own investments in order to remain productive. The training regimen required to keep a technician current with
technology has increased dramatically in recent years. New models introduced by manufacturers each year pose increasing challenges. Sending the entire
technical staff for new model training is not cost effective.
All of these factors have led to an increase in the cost of technician wages as well. The increasing demand for technicians and pay increases have
positioned the business such that gross profit retention can be a challenge.
Differences in Use
Pricing grids are used in many different ways. Different franchise types can impact the overall work mix in the department. Differences in service
departments create a need for individual application. High volume maintenance service departments versus heavy repair volumes must be considered.
A service department that has a greater volume of maintenance type work generally uses a pricing grid with a base rate with a greater rate
differentiation compared to those maintenance service prices. A service department that has greater volumes of repair type work generally uses a
pricing grid where the rate differentiation is not as great.
Advertising specials can also create differences in the use of the pricing grids. The need to change the pricing grid during specials may be deemed
unnecessary if a service department uses advertised specials only occasionally. A service department that consistently advertises specials may desire
to factor those reduced rates into the formula to achieve a pricing grid that will be utilized as standard policy.
Discounts, senior citizen rates or corporate rates may also differ among service departments. Different franchises sometimes cause a need for
consideration in design. Every aspect of customer approach and responsible positioning for maximum gross profit retention must be considered when
increases in the expense structure continue to be challenging.
Constructing a Grid
Many factors must be weighed prior to actually structuring a grid. The “Number One” issue is the mix of work provided from customer pay repair and
maintenance type work.
Establishing the current effective rate from these services provides a foundation. Conducting a repair order survey of at least 250 recent consecutive
customer pay repair orders should reveal the individual work mix. (ATcon’s Electronic Repair Order Analysis software would be helpful with the
surveys.) Several surveys over different periods of time may provide additional input. Since the work mix has many influences, the mix may change
during peak repair order generation versus when repair order traffic is not as plentiful.
Once the percentage of work mix has been identified, the overall effective rate can be determined from the same surveys. Include all labor
operations. The total labor dollars collected divided by the total flat rate hours paid provides the overall effective rate.
The next consideration is determining the total or overall work mix from all categories of labor. Factor the percentage contribution by all types of
labor to derive the overall effective labor rate. Customer Pay, warranty, internal and extended warranty types influence the overall effective rate.
Market surveys performed establish a benchmark of labor charged in your area. In order to maintain the integrity of the information, the surveys
should be performed in a way that replicates the average customer inquiring about current pricing from the other places of business.
Once this foundation of information has been defined, the calculations for the pricing grid can be administered. Elements of the formula are as
follows:
Customer pay maintenance work mix................................................. = %
Customer pay repair work mix................................................................ = %
Customer pay maintenance effective rate......................................... = $
Customer pay repair effective rate........................................................ = $
Customer pay market survey competitive pricing = $
Repair market survey labor rate............................................................ = $
Overall work mix from all categories:
Customer................................................................................................................ = %
Warranty................................................................................................................ = %
Internal.................................................................................................................... = %
Extended warranty.......................................................................................... = %
Other.......................................................................................................................... = %
Labor sales relative to each of the above categories over a specified period of time, such as year-to-date sales, establish the current overall
effective rate. Decisions as to what changes to make can be derived from this information.
Decision as to Type of Grid
Depending on the desires or needs of the individual dealership, additional items must be considered. Average repair flat rate hours from the repair
order surveys may lead to increased opportunities for frequently performed services.
Another example may be a shop that frequently performs transmission repairs. This shop may need to consider the market competition for pricing of that
individual repair. Market considerations should be factored in all areas of labor.
The frequency of specials also impacts the pricing grid structure. This may be an opportunity to establish everyday low pricing if there are ongoing
advertised specials and discounts.
Grid Types and Applications
ATcon, in association with its Service Performance Groups, developed the logical extension of a “standard” or “matrix” type grid with variations and
combinations of the following:
1. Matrix Grid
2. Matrix Limited Grid
3. Bell Curve Grid
4. Rollover Grid
5. Straight Line Grid
6. Straight Line Step Grid
7. Camlin 7 Hour Flat Line Grid
Matrix Grid
The Matrix Grid uses a fixed rate for operations below .5 allowing some Maintenance and simple operations to be more customer price sensitive. From .5
to 1.0 the escalation is limited to the target rate. After 1.0 the escalation is based upon a formula that escalates to the maximum point on the
grid. There are also four other types of Matrix Grids:
1. Matrix Grid Suffix 95
2. Matrix Grid Suffix 88
3. Matrix Grid Suffix 95 and 88
4. Matrix Grid Suffix 88 and 95
The matrix suffix grids all have rates that end with the suffix stated and, in the case of the suffix 95 and 88, the first tenth of an hour end with
the price rounded to 95 cents, the second tenth rounded to 88 cents and then repeats to the end of the hour. The suffix 88 and 95 does the same as the
previous but just reverses the order.
There are several reasons for using the suffix grids. The primary reason is an easy way to ensure pricing policy by the service advisors in that the
manager can just spot check the repair orders and see that the hours charged end with the appropriate suffix. Secondly, it adds a little more to the
effective labor rate because it rounds the price point to the higher 88 or 95 cents.
Matrix Grid Equities
The Matrix Grid is created with a constant escalation of rate. Operations less than 0.5 hours are charged at significantly lesser rates. This allows
for the minimum flat rate hour operations to be performed at a competitive rate, which creates a positive impression with the customer. Since the
price is competitive, the service advisory staff has little price resistance on these jobs. As the flat rate hours increase, so does the charge per
hour.
The principle is that the higher the repair operation hours, the higher the effective rate. This is rationalized by the higher degree of difficulty of
the job, the training required to complete the task and the special tools or equipment needed to facilitate the repair. Job pricing on these types of
operations is imperative to prevent price objections. This higher repair rate pricing only impacts a small percentage of customers when used in a shop
where maintenance work mix percentage is high.
Matrix Grid Inequities
The Matrix Grid escalates the higher repair hour jobs to a higher rate. This process could be viewed by the advisory staff as taking advantage of a
select group of customers. The service advisors can also perceive the pricing to be outside the market potential. When presenting the repair rate
pricing with customers, the staff could become apprehensive or reluctant to share too much information with the customer for fear of the rate. There
is also a tendency to take the path of least resistance in some situations, causing the quote of straight time hourly repair rate pricing rather than
the grid quote.
Matrix Grid Uses
The Matrix Grid is the most commonly used grid pricing structure. If a service department has been utilizing Multi-level Pricing or some other form of
pricing including exceptions, this is the easiest form of transition to a grid pricing structure. There are minimal conflicts and/or questions of its
logic. The calculations and effort to achieve the desired target for the grid are nominal.
Sample Graph Matrix Grid
Matrix Limited Grid
The Matrix Grid uses a fixed rate for operations below .5 allowing some Maintenance and simple operations to be more customer price sensitive. From .5
to 1.0 the escalation is limited to the target rate. After 1.0 the escalation is based upon a formula that escalates to the desired target hour on the
grid. There are five types of Matrix Limited Grids:
1. 4 Hour Matrix Limited
2. 5 Hour Matrix Limited
3. 6 Hour Matrix Limited
4. 7 Hour Matrix Limited
5. 8 Hour Matrix Limited
Each of the five grids can also have the four different type of suffixes used with the Matrix Grids:
1. Suffix 95
2. Suffix 88
3. Suffix 95 and 88
4. Suffix 88 and 95
The Matrix Limited Grids have the same equities, inequities and usages as the Matrix Grids.
Sample Graph Matrix Limited Grid
Bell Curve Grids
There are five types of Matrix Limited Grids:
1. Bell Curve Grid
2. Bell Curve Grid Suffix 95
4. Bell Curve Grid Suffix 95 and 88
5. Bell Curve Grid Suffix 88 and 95
Equities
The Bell Curve is created within each 1-hour segment of the grid. The 0.5-hour estimate throughout the grid has a higher effective rate than the
tenths (1/10) of the hour leading up to it and the tenths (1/10) of the hour following it. The Bell Curve not only has this escalation rate in the
tenths (1/10) of the hour, but also from hour to hour. This may improve the effective rate in environments that generate a high percentage of
“point-five” (.5) operations.
Inequities
The effective rate or contribution to the effective rate would be less than desirable when the Bell Curve Grid is used in shops where operations end in
“point zero” (.0) more often than “point five” (.5). Once the inequity of this grid is exposed, the service advisory staff has the opportunity to
augment labor flat rate hour pricing. Managing use of the Bell Curve Grid would need to consider periodic review of the pricing guide flat rate hour
applications to ensure that the bargaining process has not taken over.
Uses
The greatest advantage of this format is realized when the majority of repair operations end in “point-five” (.5) or one-tenth (1/10) to either side
[“point-four” (0.4) or “point-six” (0.6)]. This is a different style of pricing grid structure that is found mostly in environments where operation
flat rate hour times have been well established and little or no changes are envisioned.
Sample Graph Bell Curve Grid
Rollover Grids
There are five types of Matrix Limited Grids:
1. 4 Hour Rollover Grid
2. 5 Hour Rollover Grid
3. 6 Hour Rollover Grid
4. 7 Hour Rollover Grid
5. 8 Hour Rollover Grid
Each of the five grids can also have the four different type of suffixes used with the Matrix Grids:
1. Suffix 95
2. Suffix 88
3. Suffix 95 and 88
4. Suffix 88 and 95
Equities
The Rollover Grid uses a constant escalation in rate, much like the Matrix Grid. However, the inclination of the rate achieves a ceiling or plateau.
At the plateau, the rate then declines progressively to the higher hours. The rate never declines beyond the original base rate. This plateau must be
designed into the grid to create the limit or boundary of the escalator rate. The most commonly used rollover point is 4 hours to gain the effective
rate through frequency of use.
The rate does not continue to grow at a designated hour point in the grid. The rate declines for the remainder of the grid at that predetermined
point. The plateau is predetermined to provide for a market sensitive repair rate. This grid application can be advantageous in markets that are
competitive in repair operations.
This can also reduce staff perception of pricing beyond market. This adapts well to high percentage repair shops. A higher base rate may be used due
to reduced rates on the top end. The focus should be on frequency of operations to gain the most advantage.
Inequities
The effective rate lowers at higher hours. In some situations this may not attain the desired designed effective rate. There is a greater difficulty
in establishing the initial base rate. The service sales staff may have a tendency to charge more in order to raise their individual effective rate if
they are being held accountable.
Uses
This grid is extremely effective in competitive repair markets. Large unit repairs such as transmission, engine and drive train specialties can
compete with the after-market facilities. Small market dealers where customers are very familiar with the pricing may find this grid to be a viable
option.
Sample Rollover Grid
Straight Line Grid
The Straight Line Grid uses a fixed rate throughout each point of the grid. For example, if the target rate is $72.00 then the pricing is fixed at
$72.00 throughout. There are five types of Matrix Limited Grids:
1. Straight Line Grid
2. Straight Line Grid Suffix 95
3. Straight Line Grid Suffix 88
4. Straight Line Grid Suffix 95 and 88
5. Straight Line Grid Suffix 88 and 95
Sample Straight Line Grid
Straight Line Step Grid
The Straight Line Step Grid is designed with a fixed rate as in the Straight Line Grid but allows the user to increase the rate at each hour of the
grid. For example the user could target the first hour at $72.00 but choose to increase every hour after that by a specific amount such as $.25, $.50,
$.75 or $1.00. There are five types of Straight Line Step Grids:
1. Straight Line Step Grid
2. Straight Line Step Grid Suffix 95
3. Straight Line Step Grid Suffix 88
4. Straight Line Step Grid Suffix 95 and 88
5. Straight Line Step Grid Suffix 88 and 95
Equities
The Straight Line Step Grid uses a constant escalation in rate, much like the Matrix Grid or Rollover Grid. However, the inclination of the rate may
not be as steep, and the rate also achieves a ceiling or plateau. This plateau must be designed into the grid to create the limit or boundary of the
repair rate. The rate no longer continues to grow at a designated hour point in the grid. At that predetermined point, the rate remains the same for
the remainder of the grid. The plateau is predetermined to provide for a market sensitive repair rate from that point on.
Inequities
The Straight Line Step Grid has a ceiling or limit by virtue of the specific hour or plateau built into this format. Once the plateau has been
eclipsed, the effective rate remains the same for all jobs after that point.
Another inequity is that this pricing structure is dependent upon work mix repair hours. Effective rate could suffer if the work mix hour changes and
the grid does not. Repair order surveys conducted on a routine basis would be needed to verify the integrity of the grid and its specified hour.
Uses
Service departments that have repetitive repairs that fall into a specific flat rate hour category benefit the most from this pricing structure. The
Straight Line Step specific hour grid produces maximum effective rate at the repetition point or specified hour and does not increase the rate for hour
operations beyond that specification.
Sample Straight Line Step Grid
Camlin 7-Hour Flat Line Grid
The Camlin 7 Hour Rollover Grid was developed and named for Mike Camlin, the Service Director at Rosner Automotive Group. Mike wanted a grid that had
limited escalation through the first 7 hours and then to flat line at a fixed rate after the 7th hour. There are five types of Camlin
7-Hour Flat Line Grids:
1. Camlin 7-Hour Flat Line Grid
2. Camlin 7-Hour Flat Line Grid Suffix 95
3. Camlin 7-Hour Flat Line Grid Suffix 88
4. Camlin 7-Hour Flat Line Grid Suffix 95 and 88
5. Camlin 7-Hour Flat Line Grid Suffix 88 and 95
Sample Camlin 7-Hour Flat Line Grid
Installing Grids
Reynolds & Reynolds
Executable 3626 is used to install or build grids; multiple grids can be setup allowing a different grid for service or collision. Separate grids can
also be setup for repair or maintenance. Also labor types can have different grids for Customer, Warranty or Internal. Multiple franchise stores can
have separate grids based on “Make Codes”.
ADP
The function is ULG. It will take you through building the grid but be sure to choose F "flat rate" when asked Add the numbers in as the grid
reads. When asked to name the grid, use something you will remember later. When you complete 15.99 hours, make the last entry 16.0 - 99999 equal to the
highest Grid level and make that entry H "hourly" not flat rate.
Then go to ULT, select the labor type you wish to use (CP?) the grid for and add it.
Summary
A pricing grid must be developed that meets the needs of the individual market for the location. The pricing grid can be established in a combination
of styles and formats. With all of the different types, styles or formats of application, there is a pricing grid that will fit each specific need or
market.
Careful consideration during the development of the pricing structure should ensure customer sensitive pricing that remains a mathematically viable
effective rate to operate the business with a desired net profit.
For any questions you may have about choosing the correct grid for your store, feel free to contact ATcon (1-800-692-2719) and discuss your
options with an ATcon Consultant.
