Gross Profit Margin on Labor
We have spent the last couple of parts in our Profit Boosting Boot Camp series focusing on your gross profit margin and your gross profit margin on parts. This post will focus on your gross profit margin on labor.
Combined with your gross profit margin on parts, this is the second part that makes up your overall gross profit margin. Similar to the gross profit margin on parts, this more focused metric allows you to pinpoint what specifically is helping your shop's profitability or what could still be improved.
To help better understand how your labor prices are affecting your profits, calculate your labor profit margin by subtracting the labor costs from the revenue from labor, and then dividing by the revenue from labor.
It's important to note that your services—labor and expertise—are a big part of what you offer to your customers, and should be priced accordingly.
Improving Your Gross Profit Margin on Labor
Like any KPI, tracking is one thing, but what you really want to know is how to meet your goal or improve current processes. Here are some things that can help you increase your gross profit margin on labor:
Provide Accurate Estimates
In a March of 2014 interview with shop owners who track KPIs, Ratchet+Wrench noted that providing accurate estimates is key to reach gross profit margin goals, including gross profit margin on labor. Customers pay based on estimates, so if you're not quoting the correct number of hours, you're not making as much per job as you should. Work to ensure every estimate is as accurate as possible.
Charge for Every Hour
The Ratchet+Wrench article goes on to point out that you need to be charging for every hour it will take to complete the job. If there are special circumstances that you know will cause the tech to take longer than normal to complete a particular job, charge for it. Every hour your techs are working on an engine that a customer isn't paying for, you're losing money.
Increase Billable Hours
This goes hand-in-hand with providing a proper estimate. The more time your technicians are working on an engine, the more money your shop is making. Charge for diagnostics, streamline efficiency protocols to allow for more billable time, and work on bringing more customers in to help raise the overall number of billable hours you can sell.
Decrease Non-billable Hours
Inversely, you can focus on decreasing the number of hours your technicians spend not working on a job. Evaluate your shop's processes, or create standard processes to help identify and eliminate things that are costing your technicians time and you money.
Make Sure Your Labor Rate is Competitive
As we previously mentioned, the skill and expertise of your staff is a large part of what your customers are paying for, so it's imperative that you're charging an appropriate rate for their time. You want to make sure it's within industry standards, but it's a good opportunity for you to increase profits, as it's not as easy for a customer to look up the cost of shop labor hours as it is for them to find the price of various parts online. Obviously, overcharging can drive customers away, but don't be afraid to charge what your technicians' time is actually worth.
Set a Different Gross Profit Margin Goal on Parts and Labor
Bob Cooper, writing for Elite in July of 2015, urges shop owners to evaluate their gross profit margin goals. He notes that many shop owners follow the margins set by their mentors, but in an age where customers are able to cost compare part prices online easily, that may not be the most profitable thing for your shop. He poses the question: would you rather defend your higher price markups or the cost of your skilled workers? Oftentimes, it's easier to convince a customer of labor costs, and even make them glad to pay them, if they feel that your workers are the best around. Lowering your parts profit margin goals and raising your labor goal to make up the difference can help you to increase sales.
We'll talk more about efficiency in an upcoming post, but as general concept there are some strategies you can employ to help raise your gross profit on labor. Again, evaluate your current shop processes. Are there redundant steps? Places where your workers are losing a lot of time? Think about how each process might be optimized. Can someone else be assigned the task? Is there helpful technology that would cut down on time? Can steps be removed without hurting the overall effectiveness of the process? Thinking about these things can help keep your technicians working smoothly and effectively, allowing the opportunity for more profit on labor.
The following infographic brings these ideas together:
To learn more about how to optimize labor efficiency, check out our free white paper.
What to Think About When Making Changes to Improve Your Gross Profit Margin on Labor
Often, decreasing non-billable hours is not an employee or technician issue, but a procedural problem. Yes, you'll have the occasional personnel issue, but if it's a consistent problem throughout the shop, take a look at the operating procedure before thinking it's your employees wasting time. You might be surprised to notice inefficient processes or ones that haven't been changed as your shop has. Evaluating and editing these procedures may be the key to fixing time management issues.
Make sure that you're not pushing efficiency so far that you're sacrificing quality. It's true that you want to get things done quickly, but quality is also the key. You'll lose even more time and money if a customer has to come back with a problem on the repair that was rushed than by taking the proper amount of time in the first place. It's all about balance.
Tracking all three of these metrics really paints a clear picture of how and where your shop is making its money and affords you better control of the situation. Once you understand what's really happening, you can make moves to shift areas that need improvement to higher profitability and really evaluate which strategies have helped you reach the numbers you want to see.
Next up, we'll be talking about your net profit margin to help you better understand the overall financial health of your shop.
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