How Effective Is Your Labor Rate?
The automotive repair industry has evolved so much. Years ago, it was a simple trade that was fairly straight forward. Today, we are involved in a technological profession that is becoming more complex and demanding every day. The equipment, technology, and tooling required for a modern shop is far more expensive than ever before. Shop owners and managers will tell you that keeping up with the demand can be all but impossible. With the ever increasing dependability of cars, many shops have resorted to discounting and lowering prices in an effort to maintain car count. This race to the bottom leads to less revenue for the shop, lower quality employees, cheaper parts, and a buying experience that attracts a customer that is interested in the lowest price and nothing else. This becomes a self-fulfilling prophecy. We create this nightmare shop where we have to struggle every day and compete on a price alone.
Why does this happen? It is happening because we undervalue what we provide as an entire industry. A great example of this is the fact that most shop owners are afraid to raise their labor rate. They will tell you that if they raise their prices, and especially if they raise their labor rate, they will lose their customers. I assure you, this is not the case. Think about it. What is your Doctor’s labor rate? You probably have no idea what their labor rate is! What we do know is that we can depend on them to take great care of us when we need it the most. The same is true for accountants, optometrists, and other professions. The mindset that we promote has been price is all that matters. This has caused a financial crisis for our industry. For example; if a shop had a labor rate of $70/hour in 1980, and only increased it to keep pace with inflation, that shop’s labor rate would be $236.82/hour today. This does not include any increase for the advancing need for technology or tooling during the same period of time. It really is no wonder that the average shop struggles to find quality technicians they can afford and owners are lucky to have a net profit of only about 3% each year.
Embrace the Relationship Model
We need to do a better job of embracing our customers that are interested in getting value when they come to our shops. Most customers want to have us as their “go to” shop. The majority of customers are interested in having a great buying experience. Surveys done in this area show the same top three things people want when they come to your shop:
· Convenient & Friendly
· Vehicle fixed correctly the first time
· Work completed on time
You may be asking yourself, where does price enter into the surveys? The answer is, about 7th-9th on the list. The message is clear. The experience of doing business is far more important than the price. Give your customers what they truly want. They want quality, professionalism, caring, and value. People are more than willing to pay for a great level of service.
Shift your focus to delivering a buying experience that exceeds expectations. Create a shop experience that causes customers to drive past other shops and go out of their way to do business with you. Why can Starbuck’s charge so much for coffee? Because it’s more than coffee, it’s a premium buying experience. Great customer service, soft music in the background, the aroma of freshly ground coffee wafting through the air. The total experience creates a situation where price is never questioned, or even discussed.
The independent shop has the ability to respond to its customer’s needs much better than the big box franchise shops down the road. This allows you to reach your customers at a personal level and deliver exactly the experience that will keep them coming back.
Shift the Focus Away From Price
Another way we wind up in trying to compete in the price arena is by doing phone quotes. A properly handled phone inquiry can get that car into your bay without quoting a price on the phone. Its fine to quote menu items and basic services, but don’t quote a price on a repair that may or may not be needed on a car you have never seen. It never ends well. More importantly, it diminishes your shop to nothing more than price.
Use your shop management system to improve your invoices. It makes sense to keep part numbers and labor hours off your customer’s invoice. Your invoice should read like the sales presentation. The parts price, the labor price, and the total.
Set the Right Labor Rate
Most shops set their labor rate by other shops in their market. While it is good to be aware of your local market, you should set your labor rate based on making your shop sustainable and, more importantly, it must be profitable. For example; a shop has three technicians. One tech earns $20/hour, one is at $25/hour, and one is at $30/hour. Next add in the cost of uniforms, FICA, Futa, Suta, vacation, and sick time, etc. Add in everything it costs to have those technicians at work. Generally, this will add about 33% to their base pay. This loaded cost of technicians becomes the following:
$20hr + 33% = 26.66
$25hr + 33% = 33.33
$30hr + 33% = 40.00
$99.99 divided by 3 = $33.33
Add them together and divide by 3 for your average cost for a billable labor hour. For a profitable labor rate, you should make 70% gross profit margin on labor.
$33.33 + 70% Gross profit = $111.65
Another cost to factor in is training. Let’s say you need to do about $6,000 in technician training each year. If your shop is open 250 days x 8 hrs x 3 techs, that’s 6,000 hours. Add one more dollar per hour to pay for training your new technicians. Your new labor rate is $112.65/hour.
If your existing labor rate is much lower than the new one you need to implement, then you need to raise it incrementally over a period of time. In order to be profitable you have to get to the needed labor rate. Most customers will not even notice the change.
Your labor inventory must be sold every day. It is perishable if it is not sold today. It is a lost opportunity. This is important to keeping labor profitable. Use your shop management system to develop multiple labor rates. For example; A diagnostic rate. Factor in that this is your most expensive technician using proprietary software and other costly resources. Modified vehicles should have a higher labor rate to account for things like raised or lowered suspensions, custom wheels and tires, or added equipment that makes them harder to work on.
Doing this will make you competitive on ordinary jobs and, at the same time, help you maintain your profitability on more challenging jobs. To monitor your profitability on labor, check your effective labor rate. Divide your labor dollars collected by the labor hours sold for the same period of time. The goal is to be at 90% or better. Review your labor rate quarterly and raise it at least annually by no less than the rate of inflation. By paying attention to all of these things will insure that your labor rate is effective and your shop remains profitable.