By Murray Voth
The automotive service and repair industry has relied on dated business practices for much too long. Using labour rates and labour guides the way we currently do has caused us to compete in such a way that it’s become a race to the bottom. Along the way, we have trained the driving public and consumer groups to use labour rates and labour guides as a weapon against us.
Labour guides were never intended to be unconditional; they were designed to help shops create estimates and billing – not only to give a customer an estimate before we started the work, but to maintain our profitability. I would like to get the industry back on track to the original intention of labour rates and labour guides.
The first step on the journey of this transformation is going to be a name change. We are no longer going to call it labour or labour rate.
The word labour has garnered a lot of negative press with the driving public, because it is something they must pay for. From now on, we are going to call it service and service rate.
Service is something we offer, that we give to the customer. In turn, they pay us a service rate for the services rendered. It is a much better value proposition, as well as a much more professional term.
I have always said that we need to behave more like accounting, legal and engineering professionals.
The second step is a much larger one. Car owners all need and want to manage their money and not overspend on car repairs and maintenance. That has led some of them to shop around and get multiple estimates. The challenge for them has been comparing apples to apples; there are so many variables that come in to play.
Each shop has its own value proposition. It is not only about the cost of the service and the parts, but all the ancillary value that comes with them. There is a huge range in the quality of parts.
Maybe it’s not as large, but there is also a range in the quality of workmanship. Then there is the warranty offered with the service and parts. In addition, there are many other value-added features to the automotive service experience: shuttle rides, courtesy vehicles, digital inspections, highly trained service advisors to assist in decision making – just like accountants, lawyers, and engineers whom we pay to advise us.
It has also been a challenge for shop owners and service advisors to communicate their value proposition clearly, as well as understanding what they are competing against.
Some automotive shops use bait-and-switch techniques to get customers in the door, while others give estimates over the phone without having looked at the vehicle.
Customers phone around or do research online, using price as the only comparison. In some cases they are finding the lowest price for parts at one shop and the lowest price on service at another, and then asking the rest of the shops to match that price. So what are we to do?
We are going to start at the other end of this proposition. We are going to discuss how to calculate our service rate based on our fixed and variable costs, net profit required, and on our value proposition.
I think when shop owners and service advisors understand this clearly, it will be easier to compete in the marketplace. Not by being the lowest, but by understanding the cost and the value and finding the right kind of customers who are willing to pay that rate for that kind of experience.
Too many shops are started by technicians who think there is a large gap between their hourly rate and the hourly rate the shop charges.
They think their bosses are greedy, so when they open their shop they swear that they are going to have a much lower rate and not rip off their customers. In fact, they think that they are going to steal all their boss’s customers.
That rarely works out. If they don’t go out of business first, they realize very quickly that they need to raise the rate to meet their expenses and have some money left over to take home. The other common occurrence with shops that have survived and stayed in business is the annual phone-a-thon on January 2nd to find out what all the neighbouring shops are going to do with their rates.
This next step involves another name change and a concept that will be new to many of you. We are now going to have a facility service rate. This rate is going to be calculated very specifically based on several known factors. These factors are:
- occupancy costs
- owner’s/manager’s salary,
- service advisor salaries,
- total of other operating expenses,
- the dollar value of parts purchased in the last calendar year,
- the number of technician hours worked in the last calendar year,
- the average technician hourly wage,
- the number of hours billed, and
- the net profit required/desired.
Together these numbers will tell us what our facility service rate should be.
Looking at Figure 1.0, we see the annual numbers of a stable, profitable shop. Based on all the factors mentioned above, we can see that they are achieving their net profit goal of $150,000 with a facility service rate of $120 an hour. A key factor to note is that they are billing out 70% of their time. Could they be doing better? Of course, but they are already above average.
Looking at Figure 2.0, we see a shop with the same factors as the above shop except for one. This shop is only billing out for 54% of their time. This is the industry average. You will note that to achieve the net profit of $150,000, they would have to be at an hourly facility service rate of $155.56, which is unrealistic in their marketplace. They would be punishing their customers for not using their time effectively. In reality, at $100 an hour they are 20% below where they should be, and so only broke even this year.
In Figure 3.0, all the factors are the same except for the other operating expenses. The other operating expenses have gone from $118,000 to $150,000. They have added a $32,000-a-year salary for a valet to drive the shuttle and to wash and vacuum clients’ vehicles after service. This shop has added value to the client, and therefore is able to have a higher facility service rate. The rate they need to charge to pay for this extra value is $129.14. You will see that they remain at $120 an hour, and therefore their net profit is less by $32,000.
There are many permutations that we could discuss. For example, if the shop was at a 45% gross profit on parts rather than 50%, their service rate would need to be $137.71. And if in fact they allowed their customers to supply their own parts, they would need to be at $179.29 an hour in order to achieve their net profit goals.
The reality is that most shops have no idea what their service rate should be, and then don’t understand the effects of poor billing practices, poor parts margins, and the worst culprit of all, discounting. A 5% discount means that we would need to increase our service rate from $120 an hour to $130.71 an hour. That is a 9% increase in service to cover a 5% discount on the whole invoice.
I trust this information will assist shop owners today achieve their net profit goals.
This article originally appeared in a print edition of Indie Garage.