Effective Labor Rate is a calculation that shows what a dealership’s Service Department makes per billed hour. The formula for this KPI is: Total Labor Sales / Total Labor Hours.

The Effective Labor Rate (ELR) is an extremely important KPI for the Service Department, very simple to calculate but very useful to reflect the true profitability of the workshop.

The ELR is a calculation that shows what a Service Department makes as profit per billed hour; it’s a quick glimpse that shows if we are maximizing the revenue potential of the workshop.

For example, let’s say your labor rate is $100 per hour and your monthly service sales were $70,000 with four technicians working full time during the month for a total of 800 work hours.

If the dealership had a perfect rate, revenue should have been $80,000 ($100 x 800 hours) in labor sales for that month. Because $70,000 was billed, the ELR is $87.50 ($70,000 / 800 hours) instead of $100.

To increase profitability and run a successful workshop, the Service Manager can:

• Set a goal for the Effective Labor Rate
• Continually analyze the ELR
• Create strategies to improve it

On a monthly basis, analyze the ROs to determine what needs to be improved and what actions you should take to do so. 

Try to analyze 100 ROs each month—100 ROs per service advisor per month would be even better—comparing your department’s performance against guidelines. 

With your eye on the goal—to maintain an effective labor rate that always exceeds your target—and your ongoing RO analysis in hand, you can do minor tweaking with major results. 

You should also review computerized reports on a daily basis to monitor the ELR, which will fluctuate depending on the work mix. 

You want to manage the sales effort to minimize one-item ROs—as the count of one-line items decreases, your hours per RO increases—and maximize the use of menus, pricing guides and controlled work mixing scheduling. 

Some simple strategies to improve ELR

Monitor your ELR

The Effective Labor Rate should be on the Services Department’s KPi Dashboard, so the Service Manager can check on it every day. If it drops, the Service Manager should have the tools to discover why.

Analyze your repair orders

Every month, look at a certain number of ROs for each service advisor, with an eye for minimizing one-item ROs. The less one-line repair orders you have, the higher your hours per RO.

Create a pricing strategy

Take the time to develop a well thought out pricing plan that addresses operating costs, market demand, response to local competition, and specific profit goals. Dealers often feel that their prices are above the market average when they are often not.

Beware of discounts

An important step towards improving the Effective Labor Rate is to ensure that all discounts given are intentional, and that there are no unauthorized discounts. Offering discounts can be a great way to win over new customers. However, being too flexible on pricing can be detrimental to keeping a healthy Effective Labor Rate.

Train the team, and hold them accountable

To maximize the Effective Labor Rate, the dealership should take the time to train employees (service advisors, technicians, etc.) on the use of menus, pricing guides, preparing quotes, etc. Good training adds value to the customer experience, which will keep the Service Department away from discounts and moving towards a higher Effective Labor Rate.