So you need a part to fix a customers car, what do you do? Well in these tough economic times there is a growing trend to towards shopping around to get the best price with 74% of garages ordering from three or more motor factors, but have you considered the true cost of that saving?
Let’s say you phone five different suppliers (which 15% of garages are doing) for a price on a part perhaps a clutch for instance, it takes three minutes each time to get the price and availability from them. So you have phoned two local factors, two national factors and the main dealer you now need to decide where to order the clutch from. There is a mathematical formula to work this bit out, but for now let’s say you spend five minutes deciding.
Putting aside all the debates about brands, quality etc and assuming that you make your choice purely on price, you go ahead and order the cheapest clutch for your customer. The part arrives, you fit the part and invoice them for the repair, with your usual mark up on the parts used, but wait did you invoice the customer for the time you spent hunting down that bargain? Lets go back to earlier in your day, how long did you spend phoning around getting prices?
Five suppliers at three minutes a call (5×3=15) and then spend another five minutes or so deciding based on Hick’s Law. Now here is the science bit; picture yourself looking at a menu with 50 items on it, you have to choose 2 things from so that gives you 1,225 possible choices. Our brains find it difficult to cope with a large number of choices, meaning we take longer to decide. In 1951, William Hick expressed this through a formula, which has become known as Hick’s Law.
T = b log2 (n+1)
Every time the number choices (n) doubles, the time you take (T) to decide increases by a fixed amount, which is shown by the logarithm to base 2 (log2). The constant (b) varies according to the person and the choice they are making. The (+1) is added to the number of choices because there is uncertainty about whether to respond or not, as well as about which response to make. Hick’s Law, named after British psychologist William Edmund Hick, describes the time it takes for a person to decide something based on of the possible choices he or she has.
This basically boils down to the more choices you have, the longer it takes you to make a choice. So anyway, back to your phone calls and the total time you spent shopping around was… 20 minutes! Lets put that into perspective, if you charge between £30 and £60 an hour, the cost of your labour during that money-saving exercise was anywhere from £10 to £20. The thing is we all know you don’t charge the customer for the time you spent ringing around, you charge them based on how long it took you to do the job.
Whether you charge them a ‘book time’ or just the time you took is down to you, but neither will likely include the time you spent on the phone. Now let’s think about that £20 you lost out on, it’s not just £20 it’s more than that. If we said each phone call cost you 10p so that is at least another 60p. Not a lot it seems but they soon add up, doing this five times a day puts another £3 on your phone bill. Added to the value of the lost labour, phoning around for prices five times a day, five days a week could cost you over £500.
Suddenly things start to look a little different now, the bargain hunting is costing you money, possibly twice! Yes twice if you use a percentage mark up when invoicing your customer. Purchasing the lowest priced clutch means less money for you. For example a clutch bought for £40 and marked up by 25% earns you £10 profit however a clutch bought for £50 marked up by 25% gives you £12.50 profit. But remember it cost you at least £10 in labour to get the cheaper part…
In summary then, it seems fair to say that as a business you need to seriously consider who benefits the most from shopping around on prices. The only real winner in your bargain hunting is your customer, who walks away with their car fixed and a slightly smaller bill. All your hard work actually means you end up with less cash in your pocket, and that is never a good thing!
If you take into account the lost labour and the phone call, it could cost you almost £25,000 over course of a year. With it comes the risks associated with cheap parts. Free redo’s, warranty claims and loss of your reputation all affect your earning potential. As we have seen here, shopping around can turn into an unprofitable enterprise for you. Save yourself time and earn more money, by limiting the amount of phoning around you do and stick with a supplier that provides you good quality parts.
Here at Mill Autoquip, we pride ourselves on having excellent O.E. quality parts, from O.E.M. suppliers at competitive prices. This means that you can feel confident that the only phone call you need to make is to us. As we have shown here, shopping around can turn into an unprofitable enterprise for you. Save yourself time and earn more money, by making just one call to us here at Mill Autoquip. As they say, we supply “quality at the right price”.