Supply & Demand: A Misunderstood Concept - BodyShop Business
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Supply & Demand: A Misunderstood Concept

Insurers offer volume in return for lower prices. But volume discounts do NOT apply to labor.

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Writer John Shortell is body shop manager at Secor’s Collision Technology in New London, Conn. He’s been in the collision industry for more than 20 years and has developed computer software for body shop scheduling called BodyShop Schedule Pro, for subletting towing called Tow Bill Helper and for printing estimates in dollars called Dollars & Sense. For more information, visit www.bodyshopsolutions.com.

Sometimes the truth is so painful we just can’t speak it. Sometimes the truth is so obvious we just don’t see it. Sometimes the truth is so inflammatory it becomes painfully obvious, thus it must be hidden. And every now and then, someone like myself comes along who relishes the truth, especially when it causes much anguish to those whose heads are buried deep in a litter box.

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The collision repair industry is one of the most ignorant industries in our great country.

OK, lick your wounds, curse me out, have a tantrum – whatever it takes to make you feel better. When you’re done, read on to see if you don’t agree with me.

What’s your education level? Do you have an MBA? CPA? Law degree? Bachelor’s degree? Associate’s? Maybe a high school diploma?

What are your qualifications for running a body shop? Are you ASE certified? I-CAR Gold trained? A graduate of your paint supplier’s manufacturer training? Do you have 20 years experience slinging mud or painting?

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Running a collision repair business is a complex adventure to say the least. I’m not going to repeat the list of skills needed to run your business. You know them well. You’re probably the CEO of your shop. But can you go head-to-head with the CEO of Allstate or GEICO in any business or intellectual endeavor and come out on top? Would you send your painter’s helper outside to negotiate an estimate with one of Allstate’s appraisers?

Probably not, but that’s basically who the CEO of Allstate sends out to negotiate with you. The insurer sends someone from the lowest part of its business hierarchy to negotiate with someone near or at the top of yours.

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How’s that make you feel?

Sorry for destroying your self-esteem, but this isn’t a government school system; this is business, and feel-good attitudes here will only cost you money.

Your adversary, or partner – depending how you look at the insurance industry – is made up of highly educated, slick business people. When they have meetings discussing auto claims issues, they get a good laugh at our expense. Believe it. They do laugh at us. They know our weaknesses and our lack of business expertise, and exploit these weaknesses with gleeful vigor.

One of the insurance industry’s most successful exploitations is the direct-repair program. I know, the DRP argument has been raging for years, and it’ll probably continue forever. But this transcends the old arguments. What I’m about to explain are simple, common-sense business concepts – concepts the insurance industry knows very well.

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We’ve all heard the term “supply and demand.” Supply and demand are the cornerstones of the United States capitalist economic system.

The concept is simple. The more of something available, the lower the price should be. When the supply of something is low, the price rises because some people are willing to pay more than others to acquire the item in demand. This is how gas prices work. This is also how auctions work. It’s capitalism in its rawest form.

If you have a DRP agreement with one of the larger insurance companies, that insurer probably promised you volume in return for lower prices. Here enters another common business concept – volume discounts.

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The theory works like this: Items sold in large quantities can be sold at lower prices because some of the costs involved are lowered, such as transaction, advertising and shipping costs. Also, most products are manufactured in large quantities and stocked for sale. If the product sits in stock and remains unsold, its value can decrease, it can expire or it can be made obsolete by newer designs. This can create an incentive for the manufacturer to discount the price to move the product.

Since we all seem to have an innate understanding of volume discounting, the insurance industry’s tactic of offering volume in return for discounts is very effective. Thousands of body shops are repairing millions of vehicles each year at below-market rates in exchange for a busy shop. It seems like a fair deal to many. A busy shop means money and profits right?

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Guess again.

Here’s where your lack of business education could be hurting you. Repeat the following until your throat hurts:

Volume discounts do not apply to labor!

The concept doesn’t transfer from tangible items to labor. This, my friends, is the secret to the success of the DRP for the insurer – and the secret to the frustrations and possible demise of any shop dependent on DRPs for the bulk of its business.

This is the big lie!

Remember supply and demand? In the repair world, supply is the available repair hours for a given period. The demand is your backlog.

A finite number of repair hours are available for your shop. If you have four technicians who each average an efficiency rate of 150 percent and who each work 40 hours per week, you have a supply of 240 hours per week.

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If your DRP sends you 400 hours worth of work each week, the demand outweighs your supply by 160 hours. In any other business, that huge difference would translate into price increases. Only in the autobody world is the business establishment so ignorant that it does the exact opposite. Simply put, if you have a backlog, you’re not charging enough.

The only way to increase your supply is to hire more people, expand your working hours or increase efficiency. One of the benefits of our moronic business practices is our increased efficiency over the years. But there is a limit to how efficient your shop can be and still produce quality work.

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Too many shop owners fall into the trap of expanding their businesses too fast, and they’re left with a huge, hungry elephant to feed. This is part of the insurance industry’s exploitation. Get a shop dependent on its referrals. Get a shop to expand its operation and overhead so it becomes even more dependent on insurance referrals.

Growing your shop to accommodate the increase in demand means hiring more techs and support staff, increasing overhead, increasing headaches and stress and, ultimately, lowering your gross profit margins. But hey! You’ve got that volume thing happening.

Your supply – your available labor hours – is finite. You cannot sell labor hours in bulk; it still takes an hour to produce an hour’s worth of work. You cannot produce and stockpile labor hours when business is slow and sell them later when demand increases. You cannot discount large quantities of labor hours without seriously affecting your net profit margins.
And yet, every day, tens of thousands of us do just this. Every day, we help to fatten the bottom lines of thousands of insurance companies. And every day, the insurance industry laughs at us. They pity us, while hoping that our ignorance will continue to lead us along the path of mere survival.

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In an open, free-market system, demand strongly influences price. But for some reason, tens of thousands of shop owners ignore this system and continue to hold labor rates artificially low. We’re afraid to lose a job.

“I can’t lose a job to another shop. I’ll lose that customer forever!”

Uh huh.

If your shop is just another average hack shop, that just may be true. But, if you run a quality shop known for customer service and high-quality repairs, think again.

What’s your favorite restaurant? Can you always get a seat? I’m sure there are times when there’s a wait. If you’re too hungry to wait, you go somewhere else. Does this mean you’ll never return because they were too busy once?

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What if you’ve been doing Progressive DRP work all week and can’t afford to go to your favorite restaurant Saturday night? You end up settling for McDonalds. Does this mean you’ll never return to your favorite restaurant because you couldn’t afford it one time?

Restaurants in New York City have waiting lists days, weeks or months long. Why would people wait that long? The same reason they’ll keep coming back to your shop if your product is something they can’t get elsewhere.

Shops with backlogs need to take a long, hard look at their operations. Not the repair part, the financial part.

That group of customers waiting for you to fix their cars is a diverse group. Some of them are willing to pay more than the others for a spot on your roster. Some of them have better insurance companies than others do.

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Why would you keep a customer waiting who has a good insurance company – a company willing to pay you what you deserve to repair that vehicle the way it should be repaired – while you work on a vehicle insured by an “el cheapo” company?

If you use the dynamics of supply and demand to weed out the lower-profit repairs, you can ease your backlog while dramatically increasing profits. When business slows down, you can adjust down your prices to expand your potential pool of customers.

Think about the insurance companies you hate working with. How’d you like to eliminate them from your life? Using supply and demand and setting some minimum financial goals with each repair order will accomplish just this. Run your collision repair business like businesses are run in other industries, and your profit margins will increase dramatically, your stress will decrease and, most importantly, you’ll wrestle control of your business from the hands of the insurance industry.

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Writer John Shortell is body shop manager at Secor’s Collision Technology in New London, Conn. He’s been in the collision industry for 20 years and has developed computer software for body shop scheduling called BodyShop Schedule Pro. For more information on the software, visit www.bodyshopsolutions.com.

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