Monday, November 10, 2008

Hey, Joe the Plumber, What’s the Correct Role of Parts Pricing?

To understand pricing, you really need to understand Joe the Plumber. He was my favorite. Joe the Plumber questioned Barrack Obama about his taxes going up and claimed that he’s considering buying another plumbing business. Well, it was captured on TV, and next thing you know he’s travelling with John McCain, got a press agent, and signing contracts. Meanwhile, we find that he hasn’t paid his current taxes, he’s not a licensed plumber, ain’t’ going to buy nothing, was not registered to vote, and determined that he’d pay less taxes under an Obama administration. Joe’s no dummy – he’s just following his nose in the wrong direction. In terms of pricing, many in the industry are taking Joe’s lead and letting their instincts lead them in the wrong direction. We have loads of evidence that helps us become more “Joe-like.” The Conference Board just published a depressing graph in the NY Times, showing customer confidence at its lowest level in at least 40 years. The GDP made an unprecedented decline last quarter. Fox News and MSNBC may not agree on who’s the worst person in the world (Keith seems to nominate Bill O’Reilly most nights) but do agree on a bleak near term.

Joe the Plumber, if he were working for an OEM, would take all this in, get a press agent, buy a new pair of jeans, and declare that we shouldn’t raise dealer net parts prices for awhile. He’d be dead wrong. The NASPC Parts Manager Satisfaction Survey was just published – over 11,000 dealers participated. (Call Harry Hollenberg on this – he’s the expert – 978-985-6659.) We launched the 2008 survey during the post-Lehman Brothers economic collapse - the worst possible time in the world. It is interesting to note that average dealer satisfaction with the OEM actually rose from the halcyon days of 2007 to the funk we are now in. Average dealer purchase loyalty to the OEMs rose by 1.7% during that same period. RIM and technical telephone support were bigger issues than pricing, and satisfaction with OEM wholesale support actually rose.

The problem isn’t with wholesale parts prices. As I said last week, the problem is with end-customer perceptions of dealer retail prices vs. what they can get from Joe the Mechanic down the street. Have you ever purchased a mattress? It’s just like buying repair or maintenance services. Customers walk in the door with very high brand awareness and functional knowledge of what they want to buy (e.g., Joe the Plumber knows that his bed has a mattress that helps him sleep.) But, when it comes down to buying, there is little to compare to when gauging the deal. Sealy, Serta, and other mattress companies proliferate model designations almost to a store level, so you can’t benchmark product derivations and prices. Think of a mattress as being just like 98% of all your parts. There really are no benchmarks to gauge the reasonableness of the retail prices of 98% of the parts on a repair order. Sealy mattress “A” costs $400 at Sleepys with a $50 delivery and disposal charge vs. Serta mattress “B” costing $450 at Mattress Discounters with free delivery and disposal. They might be identical mattresses, but you’d never know. Joe the Plumber makes his choice not based on “parts cost,” but on which brand and retailer made him feel better about the purchase. Something he can sink his teeth into. More importantly, Serta probably won’t sell more mattresses by reducing their wholesale prices because the acceptable band of retail price comparability won’t be budged much either way they go in wholesale pricing.

OK, now let’s talk about parts pricing. For this exercise we need to upgrade Joe’s IQ – move it from 85 or so to 180: call him Einstein the Plumber. Einstein has access to all the facts. He looks at an “average” repair order (RO) for independent repair facilities (IRF) and normalizes it to $100 so he can easily compare costs. He does the same with average dealer repair orders. First off, Einstein immediately sees that the total costs on the ROs are nearly identical. Hmmm he says. He compares the parts charges: IRF’s at $43.20 and dealers at $37.00. Einstein scratches his head because even with his prodigious mental powers he can’t compare the actual parts and parts values from one RO to another. He looks at the shop supplies and miscellaneous charges: IRFs at $20.80 and dealers at $17.30. He has no idea what these cover – maybe the IRFs have to pay more for engine oil recycling. No conclusion. Einstein then looks at the labor rates: IRFs at $70 and hour and dealers at $85. Eighty five dollars an hour? Hey, that’s a lot of money! Confirmation comes when he does the math and IRFs have $36 worth of labor on the RO and dealers have $45.70. This is an easy exercise for Einstein the Plumber, because he has something he can sink his teeth into. He concludes that dealers are more expensive. They are more expensive on the things that a common man, Joe-whoever, can identify with.

Pricing experts talk a lot about pricing elasticities. Simple concept; with all things being equal, volumes are relatively “elastic” when they react to price differences. Volume is relatively “inelastic” when there is limited relationship between prices and volumes Pricing Academics and pricing software salespersons urge us to gauge the relative elasticity of a part and price accordingly. Sometimes I feel sorry for them – they’ve got it backwards. A better strategy is to: (1) directly manage the pricing elasticities, (2) consistently price those parts you are managing to be inelastic, and (3) get a tattoo printed on your wrist to remind you that the retail pricing problem is mostly a perception problem. Directly managing inelasticities means making all things not equal. If the mattress folks can prevent us from cross-shopping mattresses, why can’t we prevent our customers from cross-shopping ROs? What does this mean? It means working with dealers to educate them how to prepare a better RO and characterize their labor charges. Serta doesn’t break out the cost of the springs from the fabric from the labor to put them together – why should we? It also means educating vehicle owners on what they get from that hour of service labor – it’s the parts equivalent of the Verizon commercial. It means educating service advisors in the entire lifecycle of customer care and education. It means fixing problems before customers walk away less than totally satisfied. It means getting dealers involved and understanding how much more money they can make. In short, it means differentiating your parts and service not so much with an eye on Madison Avenue, but with an eye on Joe and Janet the Plumbers and understanding why they assume dealers are the high cost spread. Consistently pricing parts is all about improving your yields in areas where there are opportunities (Paul Gurizzian is the world’s expert in this – call him at 248-767-9277.) It’s also about not doing stupid things, like pricing oil filters at twice what Wal-Mart fetches. Now for that tattoo … my daughter’s friends know all the best places in Massachusetts ... please don’t call her.

There are three reasons – Catch-22s – why most OEMs can’t implement such a strategy: (1) they would have to fund it with increased parts prices, and they cannot effectively manage more than single-order-effect investments strategies (e.g., this is the “Dilbert Effect” where the additional margin immediately goes to the corporate coffers with no portion to strategy funding – so, to Dilbert it looks just like any other price increase); (2) they would have to work with dealers to change the way they do business and not take a one-size-fits-all strategy … and this is too difficult; and (3) they would have to do something different and stand alone … scary.

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