The Big Lie

December 11, 2003 by
Filed under: Uncategorized 

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 that 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 deeply in a litter box. Sorry folks, but I?m going to tell it like it is.

The collision repair industry is one of the most ignorance laden industries in our great country. We?re stupid!

OK, lick your wounds, curse me out, have a tantrum, whatever it takes to make you feel better about yourself. When you?re done read on and see if you don?t agree with me.

What?s your education level? Do you have an MBA? CPA? Law degree? BA? Associates degree? Maybe a High School Diploma?

What are your qualifications for running a body shop? Are you ASE Certified? ICAR Gold trained? A graduate of your paint supplier?s manufacturer training? Do you have twenty years experience slinging mud or painting?

Running a collision repair business is a complex adventure to say the least. I?m not going to repeat the list of skills needed and tasks done everyday running your business. You know them well. You are probably the Chief Executive Officer of your body shop. 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 just who the CEO of Allstate sends to negotiate with you. The insurance company sends someone from the lowest part of their business hierarchy to negotiate with someone near or at the top of your business hierarchy. 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 and run by highly educated, and some very 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 they exploit these weaknesses with gleeful vigor.

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

We?ve all heard the term ?supply and demand.? Supply and demand is the cornerstone of the United States capitalist economic system. Nowhere are the dynamics of the supply and demand more evident than with gasoline prices. Everyone of us have experienced the effects of supply and demand on gas prices. They go up and down almost as fast as Monica?s cranium. 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 be the lucky purchasers of the item in demand. This is how auctions work. It is capitalism in its rawest form.

If you have a DRP agreement with one of the larger insurance companies, that insurance company probably promised you volume in return for lower prices. Here enters another common business concept: volume discounts. The theory works like this. Items sold in large quantities can be sold at lower prices because some of the costs involved are lowered. Transaction costs, advertising costs and shipping costs are some examples. 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. There are thousands of body shops 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?

Guess again.

Here?s where your lack of business education could be hurting you. Repeat the following sentence until your throat hurts. Volume Discounts Do Not Apply to Labor! The concept does not transfer from tangible items to labor. This, my friends, is the secret to the success of the DRP for the insurance company, and secret to the frustrations and possible demise of any shop dependent on DRP relationships for the bulk of their business. This is the big lie!

Remember supply and demand? In the collision repair world, supply is the available repair hours for a given period. The demand is your backlog. There are a finite number of repair hours available for your shop. If you have four technicians who each average an efficiency rate of 150%, who each work 40 hours per week, you have a supply of 240 hours per week. If your DRP sends you 400 hours worth of work each week, the demand outweighs your supply by 160 hours. In any other business the huge difference would translate into large price increases. Only in the auto body world is the business establishment so ignorant that it does the exact opposite. Simply put, if you have a backlog you are 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. And hire more techs? How? Where will they come from? Expand working hours? Yeah right, how long do you think your techs will stick around if you start forcing overtime? Let?s just disrespect our technicians some more.

Too many shop owners fall into the trap of expanding their businesses too fast, and they are 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 size and operation and overhead so that it becomes even more dependent on insurance referrals (or as many of you believe, dependent on insurance steering). Growing your shop to accommodate the increase in demand means hiring more techs, hiring more 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 are finite. You cannot sell labor hours in bulk; it still takes an hour to produce an hours 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. We run our businesses in the most self destructive way. And every day we help fatten the bottom lines of thousands of insurance companies. 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.

In an open, free market system demand strongly influences price. But for some reason tens of thousands of body shop owners ignore the free market system and continue to hold labor rates artificially low. We?re afraid to lose a job. Oh My God! 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 you arrive or call ahead and they tell you there?s a one or two hour wait. If you are too hungry to wait for a seat you go somewhere else. Does this mean you?ll never return to your favorite restaurant because they were too busy once?

What if you?ve been doing Progressive DRP work all week and cannot 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?

There are very expensive restaurants in New York City that have waiting lists days, weeks or months long. Why would people wait that long to eat at some restaurant? The same reason they will keep coming back to your shop if your product is something they can?t get elsewhere.

Shops with large backlogs need to take a long, hard look at their operations. Not the repair part, but the financial part of their operations. 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 the others do. 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 customer?s 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 your prices down to expand your potential pool of customers.

Think about the insurance companies you hate working with. How?d you like to eliminate them and their headaches 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, stress will decrease, and most importantly, you will wrestle control of your business from the hands of the insurance industry.

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Comments

One Comment on The Big Lie

  1. Brad Larsen on Mon, 15th Dec 2003 7:58 am
  2. John, once again you have hit the nail right on the head. I have printed this article off for my personal collection.
    I don’t know how any business owner can function without the basics of economoics anymore than they can function without the basics of business accounting. Being from the Chicago school of economics in my beliefs, I find myself time and again looking at other collision businesses, as well as my own and asking "what the hell were you thinking?"
    I would recommend that everyone out there read a few books on economics, especially Adam Smith’s "Wealth of Nations". The Foundation for Economic Education at http://www.fee.org has an excellent book store on their site that offers a host of books about free enterprise.
    Somewhere between reading your article and reading some of these books I guarantee a light is going to come on.

    Great article John. Appreciate your efforts. Brad Larsen

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