This post was originally published on Auto Success
The fourth quarter is upon us, and two fourth quarter decisions that dealers should pay particular attention to are whether or not to sign that Consumer Price Index (CPI) agreement and, if preparing to submit for reimbursement in 2025, how to optimize their reimbursement rate. Let’s tackle the CPI agreement first.
The fourth quarter is the time to home in on your warranty reimbursement opportunities. Agreements for automatic increases tied to CPI generally arrive in the mail around this time of year and may fall short of the legally entitled retail rate, which can cost dealers thousands or, more often than not, tens of thousands of dollars every year in profits from warranty work.
Automakers will do whatever it takes to keep warranty costs in check. The problem with CPI agreements is that factory rate increases could be 10% or even 20% less than a dealer’s true retail rate, and some automakers lock dealers into three-year agreements. That lost profit can equate to a huge hit to a dealer’s bottom line.
What’s at Stake?
CPI agreements offer dealers an across-the-board increase for warranty work. Automakers entice dealers to sign by granting “automatic” increases tied to CPI, but in most years that increase is nominal. The majority of the time, it’s well under 10%.
The problem is that the retail rate, which dealers are legally owed, could be significantly higher. That means a dealer who accepts the automaker rate could be leaving tens of thousands of dollars on the table every year.
Automakers may also make it seem like signing the letter and taking the increase is the dealer’s only choice. Simply signing the letter is the path of least resistance — especially when any warranty rate increase that doesn’t require work on the part of the dealer sounds like a good deal. However, when you consider the implications of not receiving the true amount owned, it pays to recategorize that piece of paper as vital to your bottom line.
The service department is one of the chief financial engines of the dealership. Optimally, service business provides enough money to pay a significant chunk of overhead for running the entire operation. Securing the highest warranty rate allowed by law, therefore, benefits every aspect of your business. It’s also worth mentioning in light of the industry-wide shortage of technicians, that higher rates can translate to higher pay, which can help to attract and retain talent.
The need for technicians is critical. CPI agreements that short-change dealers out of money they are legally entitled to may negatively affect hiring and the dealership as a whole, since service department revenue accounts for a significant chunk of the overhead needed to run the entire operation.
How to Proceed
Dealers are not required to accept an automaker’s CPI rate increase. That being said, the increase may be fair. The only way to know is to complete an analysis to determine a dealership’s true customer pay retail rate.
An analysis requires pulling potentially thousands of repair orders. Few dealerships have the time or resources to do this work in-house. That’s why the trend today is to outsource the work to warranty reimbursement vendors. The right vendor has the expertise and experience to streamline the process and maximize the impact.
It may be the season for automaker CPI agreements, but that doesn’t mean a dealer has to accept them. Taking the time to analyze if the offered rate is equal to retail pay instead of simply signing on the dotted line could equate to many thousands of dollars in added gross profit.
A BMW dealer that we worked with recently highlights what’s at stake. The dealer signed their annual agreement in December 2022. After signing, they underwent a warranty-reimbursement analysis that revealed a retail rate between $30 to $40 per hour higher than that in the automaker agreement, equating to approximately $200,000 in profit annually. Locked into the CPI agreement for two years, that profit will go unrealized until December 2024 when the dealership can submit for its legally entitled retail rate.
If you have already decided to submit for reimbursement in 2025, what can be done to optimize your rate?
1. Labor Rate Market Study – Ensure your door rate is maximized and in line with your competition.
2. Repair Order Discount Analysis – Ensure best practices when using coupons and manufacturers’ promotions.
3. Labor and Parts Matrix Analysis – The matrix helps with increased percentage pricing on parts (larger markups), especially on lower and mid-priced items and the labor grid helps with increasing the effective labor rate.
4. Price Override Analysis – Ensure advisors are using the correct method when charging for parts and service work. In some instances, advisors simply change a price on a part rather than using manufacturer coupons/promotions. If an advisor doesn’t document correctly, we will never know the original markup and the low rate will be calculated in the average, bringing it down.
5. Repair Order Review and Quality Control Check – A review of ROs and a check for “upselling” or missed opportunities on interval services, flushes, missed maintenances, etc. This helps add profit to each ticket.
