Make Sure the NAGS "Rebalancing" Keeps You on Level Ground

Will they or won't they?
They will - it's just a question of when.

National Auto Glass Specifications Inc. (NAGS) is expected to release a major change in its benchmark prices in early January. Though some have urged the delay of the pricing changes (see related articles, pages 14, 18), at press time, NAGS was expected to go ahead with its implementation. Whether or not a delay occurs, NAGS is still expected to go ahead with its efforts sometime in 2005.

Its “rebalancing,” as NAGS calls it, is actually a sweeping change in its benchmark pricing system. NAGS believes such changes will eliminate the dreaded R-parts and their related pricing, and will lead to more accurate and “defensible” (their word) pricing of auto glass parts.

A Brief History
This is the information company’s third try at price correction and is expected to bring widespread change. This “rebalancing” effort goes further in attempting to isolate the NAGS List Price™ as a parts-only pricing system than ever before.

Prior to the last NAGS revaluation, costs for parts and labor were reflected in the NAGS List Pricing™. The pre-1999 NAGS List Prices anticipated high discounts and had a profit margin built into them—even after such discounts. 

With the last revaluation in 1999, an attempt was made to have NAGS List Prices accurately reflect the cost of glass only. The belief was that if the NAGS List Price represented the price of glass only, then the enlightened in the industry would recognize the need to begin charging for a separate labor component—by the hour—as most collision repair and body shops do. Under this plan, List Prices were close to real costs, so discounts would be minimal. The assumption (and you know what happens when we assume) was made that shops would recognize the loss of the profit component in the List Price and begin charging an hourly rate for labor. This rate would, in turn, be high enough to include the profit on the job. 

Somewhere between theory and practice the plan fell apart. As Revaluation ’99 got off the ground, two key events kept the expected from happening. First, whether through ignorance or design, a number of trading partners began negotiating large discounts off the new List Prices, now called Benchmark Prices. Remember, these new prices had little or no retailer profit built in. Asking for discounts off NAGS Benchmark Prices was akin to asking an anorexic to go on a diet; he’d gladly say yes, but in reality there was just nothing left to take off before his life was threatened. 

Secondly, the insurance companies that had supported the change in theory were quick to offer a flat fee for labor rather than an hourly rate. The fact that most glass shops gladly accepted such a flat fee (“after all, we’ve never been paid for labor before,” as one shop manager told me) proved the biggest detriment to the effectiveness of the new system. Shops were expected to build the profit into their labor rates. Most glass shops were quick to accept a flat rate for labor as they had never been paid for labor before and it seemed like a great extra at the time. Those who agreed to a flat fee destroyed the only way they had to build profit into the job. The problem did not appear for the first 18 months or so, but once discounts increased and costs went up, those shops had no mechanism through which to maintain their profit. What was a squeeze then tightened into a chokehold.

Further, the changes in the distribution channel for certain parts, and the failure of the industry to embrace the new system, have increased the number of R-parts and third-party addendums. Before 1995, it was unusual to see distributors or others issue their own price lists. Today, it is common. NAGS acknowledges that the current system needs changing in order to eliminate the growing propagation of R-parts. Its officials contend that rebalancing, while not a panacea, should knock R-parts out of existence. Since pricing addendums are really third party pricing lists, there is little NAGS believes it can do to eliminate this practice promulgated by others.

Learning from Past Mistakes
Some in the industry have felt NAGS 1999 Revaluation was ahead of its time. The industry will have the opportunity to find out as NAGS debuts its “rebalancing” early next year. AGRR magazine has had unprecedented access to the coming changes in the NAGS Benchmark Price system. It has reviewed and analyzed the data for the more than 11,000 parts that NAGS tracks. It provides the following information as just that—information. Each company is, of course, free to use whatever methods of pricing it wishes and enter into whatever beneficial trading partner agreements it desires.

What You Need to Know about Rebalancing
1. The rebalanced NAGS List Price™ system is designed so that profit is to built into an hourly labor rate. Under the new system, NAGS Rebalanced Prices will closely reflect actual acquisition costs of glass. Each company will need to assess what its labor rate will have to be to maintain its current profit level.

2. A flat labor rate will make it very difficult to maintain profit levels under the new system. This was true under the last revaluation and remains true today. Most auto collision repair companies charge a labor rate and this system is designed in the same way. A flat labor rate may limit a company’s ability to maintain its profit levels for the life of its agreement. Each company should carefully consider all the implications of accepting a flat fee for labor.

3. You cannot just use the averages of old versus new part prices. Under rebalancing, the average part will be priced at 63 percent of its pre-rebalancing price. This figure, however, includes all 11,390 parts for which NAGS issues prices. Using a simple average does not take the popularity of a part into account. The top 811 part numbers tell a different story. NAGS calls this its “weighted average.” This weighted average is much more important to you than the true average. (The chart below shows the NAGS List Pricing of the top 25 parts before and after rebalancing.)

The average pre-rebalancing price of the top 811 parts is currently $737.50. After rebalancing, it will be $247.50—that’s 36% of its pre-rebalancing price. 

4. You must analyze your product mix and figure your labor rates carefully. In order to make a savvy decision about how much to charge for labor, you must know your product mix. Figure how many of each part number you install in a year to get an idea of how much you must charge to maintain your profit levels. 

NAGS has a useful electronic tool available that will help you do this and it is worth the cost. It allows you to enter your current pricing, labor rates etc., and develop your future rates based on the rebalanced prices. It is easy to use.

5. Don’t wait to do the math. Insurers and networks have the luxury of huge mainframe computers and mathematical wizards to do their analysis. You must be prepared in advance to know what you can and cannot accept in pricing, labor hour rate and “kit” pricing in order to maintain your current profit levels. Know what you are willing to “accept” in advance of being “offered” anything. (See the charts on page 23 for more information.)

Additional Resources 
You aren’t alone. When NAGS changes its pricing methods, the whole industry changes. There are a number of sources of information and help available to companies as they work their way through the numbers maze:

1. NAGS has some excellent tools available for your use. A preview kit can also be purchased from the company. Contact NAGS at 800-551-4012 or www.nags.com.

2. The Independent Glass Association (IGA) will be running a series of educational workshops around the country, designed to help its members understand and evaluate the new pricing. All workshops will take place in November and December. The IGA will also have an extensive session on the changes and their effects at its annual convention and Spring Glass Show, February 24-26, 2005 at the Rosen Plaza Hotel in Orlando. For a list of dates, times and cities, call the IGA at 952-930-3133 or visit www.iga.org.

3. AGRR magazine will devote a special online discussion on the coming NAGS changes online at www.agrrmag.com. 

Debra Levy is the publisher of AGRR magazine.