News: Consolidator Report
With DRPs losing favor and shops in desperate search for profitability, creating a consumer-focused business model may be the answer.
For Dave March, doing insurance work wasn’t a choice when he took back ownership of his old shop after the consolidator that originally bought it went bankrupt and all contracts were void. For Mike Orso, it was a matter of principle and how business should be done legally. Boyd Dingman and Dave Karney made the decision to do less insurance work incrementally as their businesses evolved and they looked for additional profit centers and marketing sources.
These shop owners, some of whom are on direct-repair programs (DRPs), aren’t solely dependent upon insurers for repair work due to the discovery that reaching the consumer directly is a viable business foundation and a valuable complement or even alternative to a DRP.
Now more than ever, the debate and emotions surrounding DRPs rage on. Some advisers and consultants are trying to promote the merits of getting on another DRP, while others are telling shops to “just say no.” There have been sound business reasons for shop owners to move in one direction or the other over the past 15 years. Now, the tide seems to be moving once again, and many shops are looking for a solid business strategy to become more independent and refocus on the consumer as their major marketing source.
It’s frustrating when the weak sheep in the market blindly go in a direction that destroys it and pulls your business into practices that are mutually destructive. It’s equally frustrating when the moral crusaders tell shops to just say no or to stand up to powerful insurance companies even though their businesses could be wiped out for doing so.
As it stands today, if a shop says no, those with the power and control will shut it off. For most, standing up to insurers, saying no to price constraints and not giving into concessions brands them as anti-insurance, renegades or worse. It’s a gut-wrenching feeling to be in such a position of weakness that you’re unable to negotiate when your business’s survival depends upon it. It’s another kind of imprisonment when you don’t have options, alternatives and choices when your business desperately needs them.
A position of weakness is exactly where many shops have found themselves after taking the bait in the late 1990s and becoming DRP junkies. While some would say to the junkies, “You deserve it,” many just can’t afford to say no. The only option left is to continue to try to succeed at being the “low-cost provider.” And so the downward spiral continues, with one shop after another agreeing to concessions that erode the market for everyone.
In the past, consolidators and large area replicators led the way to the bottom by agreeing to repair for less than it actually cost. Following M2’s 2005 bankruptcy, a financial analysis revealed that it had repaired vehicles at a loss of more than $200 per repair for years. Meanwhile, shops without the funding had to try to stay afloat. They used investment money and accumulated losses to survive while their competition was forced to comply with the same concessions or the repair work was steered away. Even today, one major consolidator offers one of the top eight carriers a discount of 6.5 percent or more depending upon performance. Most shops today don’t even net 6.5 percent. This form of dumping has driven profits to all-time lows and erased many alternatives for shops.
A Simple Answer
Here’s a simple way to stop this trend and play on a different playing field or according to different rules: You must gain a stronger negotiating position. This may require shops to add or switch sources for their repair work volume. They need to have another way to get their volume rather than rolling over for every insurer concession and demand no matter how ridiculous or detrimental.
Beyond the simple answer of “just say no,” one must address what alternatives outside of DRPs are available to get repair work and what other profit centers can be created.
Consumer Pay = More Profit
Walking away from a DRP doesn’t have to be business suicide. In contrast to most of the gloom and doom about the future of collision repair, there’s another version filled with opportunity where shops can generate 25 percent greater sales volume that’s not filled with concessions, discounts and arbitrary demands. The most compelling solution shops have to reinvent their businesses without putting themselves out of business is “consumer pay,” the basic ingredient of which is regaining ownership of customers.
Regaining ownership of customers (vehicle owners and motorists) is a bold declaration of independence. It means that shops alone will accept the responsibility of attending to their needs. This business strategy is a radical departure from the recent years of business schizophrenia where shops openly declared they had two customers, the insurer and the vehicle owner. The problem of trying to maintain these two different customers is that the approach to satisfying both is contradictory because they have different needs, wants and desires under the current way DRPs are executed.
Consider that, for the most part, DRPs as they’re known today are nothing more than “cost mitigation systems” or mechanisms. Insurers save hundreds of millions of dollars by containing and lowering the costs of claims but, of course, their savings are the repairers’ losses. To meet DRPs’ extreme demands, repairers have to cut corners and work for less…and less…and less. On the other hand, consumers want more, not less.
To regain ownership of the “consumer” customer, shops must be oriented in every way to him or her. That doesn’t mean they have to be anti-insurer, but it does mean they have to be pro-consumer. When insurers and repairers are both watching out for the best interests of the consumer, they’ll once again be trading partners and not bitter adversaries. While that may be a fantasy, shops can play it safe by always taking the moral high ground of advocating and serving the consumer first and foremost.
Shops hooked on the DRP drug are threatened by statistics from leading insurance consulting firms such as McKinsey & Company and Conning that indicate that insurers are able to steer a huge percentage (as high as 72 percent) of consumers to their preferred shops using the techniques they have available. However, that statistic ignores two major points: 1) currently, insurer DRPs have no competition, and 2) there’s another huge piece of the pie who aren’t going through their insurance companies.
We hear time and time again that the industry only comprises $25 to $28 billion in revenue, according to what the insurance companies say. However, that’s only “insurance pay.” There’s far more when taking into consideration customers who pay for collision repair themselves because the repair costs aren’t much more than their high deductible amounts. The statistic also doesn’t consider fleet, self-insured and dealership warranty. According to the U.S. Bureau of Labor Statistics, the industry is really about $38 billion. One-third isn’t going through insurance, and that’s where the greatest single opportunities lie for those wanting and needing an alternative to DRP.
Until now, consumers have never been given an alternative to the insurers’ DRPs. How can you compare the effectiveness of DRP referral when there’s no competition? When the consumer calls his or her insurer today, he or she is immediately read a script that follows a careful word track. It starts with a question like, “Have you already selected a shop to repair your vehicle?” When the consumer says no, the telephone customer service operator kicks into his or her scripted process of referring one of the insurer’s DRP shops that have agreed to its concessions. By legal interpretation, the operator is able to offer the motorist a choice of participating in the insurer’s “special program” that will provide the consumer with many more benefits and peace of mind than having to seek out a “qualified” body shop. If the consumer answers, “Yes, I have a shop selected,” the game should be over at that point. Any interference thereafter is a clear and definite violation of consumer and fair trade practices. It would even be better if the consumer declares, “Yes, I have a shop and already have a special service repair agreement with it.”
According to consumer advocate attorney Erica Eversman of Vehicle Information Services in Bath, Ohio, “In states that have enacted laws limiting an insurer from directing a consumer to a specific collision repair shop, insurers are expected to stop attempting to manipulate the consumer into the ‘preferred repair network’ once the consumer informs the insurer he or she has chosen a body shop. In those states that haven’t enacted specific laws or regulations prohibiting an insurer from attempting to direct consumers to one of the insurer’s ‘network shops,’ insurers must still tread carefully to avoid potential claims for conspiracy and unfair trade practices.” (On a sidenote, The Hartford recently announced that it’s now making a DRP a policy feature and considering the consumer’s selection of a DRP a “negotiated and bargained for insurance arrangement or agreement.” Other insurers have talked about this for years, and now Progressive, The Hartford and others are showing signs of things to come.)
‘Own’ the Customer
It’s essential for a shop to be positioned as the consumer’s demanded, preferred choice. The consumer must be able to say he or she has selected a shop and state it by name. When a shop truly “owns” its customers, those customers will ask for it by name. Ideally, shops wanting to regain a competitive position and a far stronger bargaining position with insurers need more than to hope their previous customers remember them and are brave enough to declare them as their repair shop of choice.
To win the customer, shops need a means and mechanism to ensure that all of their past, present and future consumer customers have an obligation or at least a motivation to ask for them by name. They need them to demand to come back to their shops regardless of insurers’ influence and pressures.
Shops should start with a customer retention program, not just a Customer Satisfaction Index (CSI) service. Customer retention is far more important than survey results. What’s most important to shops’ continued survival is that 100 percent of their past customers come back to them, refer a friend or family member and remain customers for life.
Most shops ignore or overlook consumer pay because they believe the percentage of work they get from it is too small and not worth pursuing. According to a national survey of 3,500 qualified shops conducted by Assured Performance Network, shops under a DRP program average only about 3 to 5 percent of their business volume from the market sources referred to as “consumer pay” – those electing to pay for the repair themselves. Based on that statistic, it’s no wonder that most shop owners feel consumer pay is insignificant compared with insurer-driven referral work.
On the other hand, the percentage of work that consumer pay represents for those who ask for the business is far higher. Shops with programs that are appealing and inviting to consumers who want to pay for the repairs themselves see an average nearing 30 percent of their total volume or higher (a statistic based upon shops that still have one or more active DRP accounts).
All a shop must do to begin attracting needy consumers is embark on an effective marketing campaign that invites those consumers to do business directly. Even a sign and a sales and estimating process that’s inviting, friendly and attractive will help increase this valuable source of business. After Assured Performance Network tracked the trend for three years, the result was that 100 percent of shops that began to use some form of program to attract consumer-pay customers saw a significant growth in this business segment. Applying the national statistics to real dollars and cents, a shop doing $2 million in annual gross sales based primarily on DRPs would generate just $100,000 or about 50 to 75 repair jobs per year from consumer-pay sources at just 3 to 5 percent. If it reached out to consumers and increased its consumer-pay percentage to 30 percent, it would recognize another $500,000 or nearly 500 to 750 repair jobs per year. The best part of this story is that these repairs are most often smaller (under $1,500), faster-turning and more profitable.
Consider the story of Dave March and Fountain Valley Body Works in Orange County, Calif. March was one of those former shop owners who bought back his business when M2 went bankrupt in April 2005. He had to fill the shop and get the employees back to work, but because the shop was under new ownership, the DRP program rules wouldn’t allow him to be on any program as a preferred repairer. So even though he wasn’t anti-DRP (and still isn’t), the only option he was left with was reaching out to consumers.
March had always relied heavily on direct retail marketing to consumers to fill his shop, so he returned to his roots and began executing marketing programs that would appeal to consumers and reward them for bringing their vehicles to him. The result was that he was able to gain back market share, get his volume over $500,000 per month and keep growing incrementally each month. Three years later, March maintains more than 30 percent of his business from consumer pay and even a larger percentage (70 percent) from consumer request.
March had proven how effective retail marketing in the 1980s and 1990s could be by using nearly everything – including radio, television, direct marketing and public relations. He also had success with an infomercial that educated the consumer on how to select a qualified collision repair business and why repairs cost what they did.
“The infomercial was just one part of our overall marketing effort that went after consumers, insurers, fleets, dealers, you name it,” March said. “We felt that one couldn’t ever tell which form of marketing would work best, so you had to do them all. The net effect was marketing pull-through and a great mix of business from many different sources.”
Some shops have taken the concept of consumer pay to another level by offering products and services beyond collision repair. After years of seeing their profits dwindle under DRPs, Dave and Alex Karney of Tualatin Auto Body in Tualatin, Ore., decided to diversify their profit centers and market directly to the consumer. The result was that their consumer-pay work went from less than 10 percent to more than 30 percent.
“We listened to our customers and studied our database of past customers to see where the new opportunities were,” Dave Karney said. “We had so many customers asking for a special kind of detail, we began to realize just how big it could be for us. Now, we have a bunch of customers who schedule to have a special detail at least twice each year.”
Over a four-year period, they successfully reinvented part of their business into selling enthusiast restoration kits and solutions with a specialty parts and accessory departments as well as offering customer hot rod and rebuilt kit cars. Today, their profits are better than ever and they have a sustainable business not affected by DRP trends.
“We added hot rods and a parts department because we found that so many of our customers wanted it,” Karney said. “I had to hire a whole crew of guys who are real craftsmen and love that kind of work.”
To accommodate the change, Karney used the extra space he gained by moving into a new building and by turning down three or four DRPs that were too expensive and too demanding. By having other profit centers, he could afford to be picky and only work with those insurers that were reasonable.
“These additional services are just one more tool that our estimators can use to close the sale and get the right jobs in here,” Karney said. “Besides, we also have far more to offer the consumer. We’re now wrapping it all into our Collision Care VIP program that integrates our marketing, additional services, specialty collision service and all of the other things we like to do to make the consumer feel special.”
Additional Profit Centers
The number of shops today that don’t do DRP work at all but instead depend upon many other sources like consumer pay, dealership referrals, agent referrals and even fleet accounts is growing steadily. Even more have begun to diversify with auto care, mechanical and other automotive-related services that complement the revenue from collision repair. Mike Orso of Nick Orso’s Body Shop and Service Center in Syracuse, N.Y., prides himself on not doing any DRP work but being 100 percent consumer oriented. While the majority of the repairs are still paid for by insurance coverage, Orso only deals with consumers. His contract is only with consumers and his obligation is only to consumers.
“It’s clear to us that the consumer is our customer,” Orso says. “We have no confusion with that. We feel it’s a moral and legal issue to work for the consumer.”
|Potential Profit Centers
Car care accessories
Orso goes after consumers and bypasses insurers altogether with an aggressive radio marketing program that educates them on steering.
“As long as I’m going to have to assume the obligation of the repair, I want to be able to repair the vehicle according to the standards the manufacturer recommends and not something less that might be demanded under a DRP,” Orso says. “Under a DRP scenario, a shop assumes a great amount of liability while the insurance company skates away. We don’t have that issue.
“I hear all the time that no one is happy with the way things are going. The answer is not to roll over for another concession but to do what you would for the consumer and help get what the insurer owes him or her contractually. It doesn’t have to be so hard.
“We do just fine with our approach and other shops can, too. They have a choice and should exercise it. Marketing to the consumer will give shops the alternative most want these days.”
Orso says it’s vital to have a plan before you jump off DRPs: “If you don’t, it could be suicide. Remember, once you say no and go off a program, the insurer will be steering away from you so you have to do something else like marketing, consumer pay, etc. You should be preparing for maybe three to four months in advance so that you make a smooth transition.”
Boyd Dingman has multiple locations in Omaha, Neb., at Dingman’s Collision Center. He complements his collision work with some select mechanical repair, car care items and other profit centers. He uses a pro-consumer approach but attempts to avoid conflicts with the insurers. His approach is to provide total claims handling for the consumer, which includes negotiating with the insurer and educating the consumer on what he or she is legally and contractually entitled to.
“Our success was totally built on trust between the motorist and the shop,” says Dingman. “The consumers tell us every day how they heard of our efforts to help someone else in need. With that reputation, they wouldn’t trust anyone but us.”
“The one thing you have to be careful of,” Dingman added, “is that consumers aren’t as tolerant over supplements and such. It’s critical to make sure they know there might be additional costs or the whole thing can go south on you. It’s all about communicating with them.”
Trust among the insurers has helped, too. “After many years in business and the relationship we have as a consumer advocate, the insurance industry here in our market has discovered what we ask for is really and truly the things we need and nothing else.”
It’s obvious that by searching for complements or alternatives to DRPs, shops can be in a stronger position to say no when they have to and yes when the decision is profitable for their businesses. Even when it’s not a decision between a DRP or not, reaching out to consumers seems to be a smart business decision that can add substantial sales to any shop and alternatives if and when it might need them.
So it might be said that freedom is not just another word for nothing left to lose, but might be another word for having choices. Consumer pay gives shops choices they have most recently lost sight of.
Writer Scott Biggs is currently the CEO and founder of Assured Performance Network, a shop-owned co-op founded in 2004 representing approximately 5,000 independently owned collision repair businesses in the United States. Biggs is the former producer and host of BodyShop Video Magazine and president of Business Development Group. He has received many awards and recognitions including Industry Achievement, Hall of Eagles, Most Influential Leader of the 20th Century and more. He has toured thousands of shops and delivered more than 850,000 hours of management education to the collision industry. His organizations have provided marketing, technology, management services and consulting to thousands of body shops worldwide since 1984.
DRP Participation: Determining the Cost
Even if you elect to perform some work for insurers through some sort of DRP, you need to be in a position where, if the stakes are too high by the demands they make, you can walk away from the table. According to an analysis of qualified shops nationwide (random sampling of 3,500 shop operations) by Assured Performance Network, the cost of complying and participating on an insurer’s DRP is a staggering 20 percent for many programs and higher for some that want most favored status.
Determining the cost of complying with an insurer’s DRP for any individual shop is difficult and thus rarely done. To accomplish this, one must take into consideration the direct costs and indirect costs. Direct costs of DRPs include specific concessions such as a reduced labor rate or parts discount. One must also take into consideration lower gross profit margins on the type of work performed, the repair methods some may demand, caps, denied supplements and even the cost of rental car coverage if a shop doesn’t meet the cycle time demands placed on it. The true cost calculations should also consider increased liability insurance costs and special insurance coverage. Specifically ask your carrier if you’re covered for the liability you may have following the repair practices required under some DRP arrangements. Also, consider that DRPs are now entering the parts business, and shops must use the vendor of the insurer’s choice.
Regaining Ownership of the Customer
The concept of regaining ownership of the customer is easier than one might think. To see the opportunities, a shop should start by honestly assessing its current business approach. It may find that the reason it doesn’t have better customer retention and the reason insurers are able to steer customers so easily is that it’s not doing all it needs to. A shop owner should ask himself or herself these questions:
• What special programs do I offer consumers like I’ve been willing to offer insurers?