Evaluating Your Posted Labor Rate
Our last few posts have focused on your profit margins and how they affect your bottom line (read about your gross profit margin here.) In this post, we’re looking at a metric you're almost certainly aware of, but you might not think about the actual impact it has on your profits—your posted labor rate. This number represents the amount per hour you charge your customers got the work done on their vehicles. This is not the same as what your technicians are paid, as the goal should be to make money from your labor rate. Many shops aim for earning at least 50%.
It might sound straight forward enough, but it’s still an important number to be familiar with and evaluate because of the impact it has on your bottom line—an impact that should be positive, but can be harmful if you're not careful and vigilant.
Deciding on Your Posted Labor Rate
When setting the labor rate for your shop, you need to make sure you're charging enough so that you're actually making money, not losing it. Because of this, you should evaluate the following numbers before deciding on your posted labor rate.
The rate you charge your customer needs to be more than your technicians cost you an hour, or you'll never be able to make money selling labor.
Along with their paycheck, you're also likely providing your technicians with benefits, like insurance, uniforms, tool allowances, etc. This is a cost to your business and should be taken into account when deciding on your posted labor rate.
Service/Parts Manager Salary and Benefits
While probably not actually turning wrenches, your service and/or parts manager is someone whose labor you pay for, and someone whom your customers benefit from. They should be paying for this expertise as part of the overall labor cost. Make sure you're considering this expense as you decide on your labor rate.
Just having your business open costs you money. From electric bills to insurance and taxes, there are things that will cost you money not associated with any job order. You have to find a way to cover these costs, and incorporating them into your labor rate can help ensure you have the money you need when the bills come in. Figure how much your shop spends on overhead costs. Include your salary, as well as any office staff, in these overhead costs.
Inevitably, there will be times when your technicians aren't working on vehicles or your shop will have a slow period. Unfortunately, during these times you'll still need to sign paychecks and pay bills, so you should think about charging enough to buffer through those times you might not have as much coming in. This is especially important if you know when your slow times tend to be, particularly if they are seasonal. That helps you to predict how much you'll need to charge the rest of the year to see you through.
These costs are all important to factor into your decision, as is the amount of profit you want to make on top of that. Just by evaluating these figures and how they can be covered by the labor rate, you stand a better chance of running a profitable shop.
Things to Watch Out for
When thinking about your posted labor rate, there are some dangerous habits people tend to have. Try to avoid them as you move to make your shop more profitable.
Obsessing Over the Competition
Many shops are more concerned with what their competitors are charging than what their shop needs. Try not to be so focused on having the lowest prices, especially if doing so will drive you out of business. It's important that your rates are competitive and at least in the range of the market in your area. If you're unable to charge a market rate, it might be good to re-evaluate your costs. What expenses are preventing you from being a competitive, profitable shop? Is there a way you can reduce these to help you charge a better labor rate? You can check out our past blog, Managing Labor to Maximize Your Diesel Repair Shop Profits, to learn how managing your labor can help save your shop money.
Flat Rate for All Jobs
Are you charging a flat rate for labor on all the jobs that come through your shop? If you are, you might be losing money. Think about your different technicians. Do they all perform the same jobs at the same pay rate? If not, it doesn't make sense to charge your customer the same rate for a complicated job only your most skilled, highest paid tech could perform as you would an oil change any tech could do. You'd be losing money on the tech's labor costs. Instead, consider varying the rates depending on the job at hand. You'll be able to make more money, and it's easier to explain to a customer that the labor cost is so high because of the complicated nature of the repair.
Unfortunately, as a repair shop owner, you're fighting against the idea the public has about shops that take advantage of their customers. The current perception of labor costs is that they are way too high because shops are just trying to bleed every last penny they can out of the work. This is not the reality of the situation, though.
Oftentimes, shops charge barely enough on labor to cover their costs, let alone make a profit. This is a difficult way to run a business. Instead, try to explain to the customer why labor costs are so high. Let them know the skilled expertise of your technicians. Give them thorough estimates that tell them exactly what is wrong with their vehicle. Show them that you're not trying to gouge them, but are providing them with a valuable service that, because it is done by your expert staff, will actually save them money in the long run because they won't have to return as often for the same problem. It is possible to fight the stigma, and for the survival of repair shops, it's an important thing to do.
All in all, evaluating your posted labor rate is an important step in boosting your shop's profits. It feeds directly into your bottom line, so it's important you don't let it hinder your shop's growth.
Up next, we'll talk about your effective labor rate and how calculating it can help show you how to improve your bottom line.
If you're wanting to save money, be sure to check out our Repair Shop Value Program page. Join today to get access to exclusive pricing and other benefits.