In the second part of our two-part series, we’ll take a closer look at the best strategies to use for pricing labor and services in your shop. (If you haven’t read the first part of this series, please go back and read [Part I] now.)
As you learned in Part I of this series, pricing may not always be as straight-forward and simple as you’d expect. In fact, sometimes, a simple mistake in the math can throw a huge wrench in your pricing plans. Without a big-picture, accurate view of your shop and its numbers, it is very difficult to land on a proper price point for items or labor.
We also learned in Part I that it’s easy to get lost in the difference between markup and margins, and we crunched some numbers to get a better grasp on the proper strategies to use, in order to ensure a stable and profitable business.
Now that you understand the essential strategies for correctly pricing parts and other items for sale, we’ll turn our focus to the other side of the income equation for your business: labor and services.
Pricing Services and Labor
Many of the concepts for pricing parts and inventory items discussed in [Part I of the Pricing Strategies] series can also be applied to pricing services and labor in a repair shop. The calculations you learned in the first part of this series can be easily transferred to labor and services.
As with inventory items, when pricing services or labor, it’s very important to start your calculations with a clear understanding of the actual burdened cost of those services. Without a clear understanding of all the extra costs associated with managing a labor force, it’s very easy to under price services to the point that your company makes little profit when it comes time to bill your customers.
As we discussed in Part II of The Real Cost of Doing Business, employee costs tend to run higher than the simple and obvious cost of paying a wage, and this needs to be considered when choosing a price for labor in your shop. Other costs associated with a labor force might include payroll taxes, worker’s compensation, health insurance, paid time off, retirement contributions, and supplies such as uniforms. These added burdens can easily increase the cost of an hour of labor by 40% or more.
Because these costs can quickly get out of hand, it’s important to base your price for a repair job, or an hour of service in your shop, on the actual cost of the labor.
Efficiency Builds Profit
Service and repair operations which move quickly and efficiently in a shop (such as oil changes and tire rotations) tend to turn a higher profit than more involved projects requiring a higher level of technical skill.
Frequent and relatively simple operations, like lube jobs, can often be performed efficiently by a technician with minimal training, at a lower hourly wage. As a result, you can afford to have a more aggressive labor rate on these efficient operations, and leverage quantity to bring profits in to your shop.
Longer and higher-skill jobs, such as rebuilding engines and transmissions, tend to use time and material resources much less efficiently. In those cases, you’d want to use a higher labor rate and put your more skilled technicians to the task, focusing on quality of work in order to reduce rework and warranty costs down the road.
Your most skilled mechanics and technicians should also be reserved for more complex jobs, such as diagnostics. Better diagnostic work up front means better efficiency in the repair bay, and also provides the opportunity for the shop to have all of the necessary equipment and parts available before work begins on a vehicle. The more streamlined the repair process is, the more profitable it tends to be.
It is good practice to always have an established diagnostic price to determine the cause of a problem. The benefit of charging an established price for diagnostics is that often shop owners or technicians will get caught in a trap of being asked what is wrong with a truck based on a vague set of symptoms. They will go out and take a look at the vehicle and provide a rough diagnostic. Then the truck owner drives off to figure out what he is going to do about it and either does the work himself, or pays another shop for the repair. It’s better if the owner simply states up front that a flat diagnostic price will be charged, in order to identify the problem for the vehicle owner. That way, the shop is always paid for those services, whether or not the vehicle comes in for actual repair work. That being said, some complex problems that can take hours to diagnose, such as electrical problems, may require billing as hourly time and materials in order to maintain profitability.
Don’t Forget About Those Extra Services and Supplies
Every shop has a variety of services and duties which are commonly left out when pricing for labor. Other duties, such as cleaning a bay after service or vacuuming the interior of a vehicle before discharging the vehicle from the shop, should always be billed back to your customer. If the bay was clean when the vehicle is brought in for service, then the operation should not be considered to be complete until that bay is cleaned again and restored to its original condition. If the bay is only cleaned at the end of the day, then a percentage of that cleaning time should be billed to each customer based on the amount of time each vehicle uses the space.
The extra hours that your mechanics and technicians spend each week on these small extra services can really add up. If you aren’t charging for them, your shop could be losing a tremendous amount of money. For example, imagine that your technician spends a measly 5 minutes cleaning the bay after servicing a vehicle. It might seem like a small and inconsequential slice of time, but if that technician services 5 vehicles a day and spends 5 minutes of un-billed time cleaning between each vehicle, your technician has spent 25 minutes rendering un-billed services that day. 25 minutes a day is a little more than 2 hours per week, 8 hours per month, 24 hours per quarter, or a whopping 96 hours per year! If you charge $65 for an hour of labor, but failed to charge for those 96 hours of 5-minute cleaning sessions, you’ve left $5,760 on the table. And that’s just for a single technician.
Another common item shops sometimes forget to charge for is shop supplies. Every job consumes a number of miscellaneous items in performing the job, from key tags to oil change stickers, inspection forms to cleaning supplies. All of these items should be accounted for and included in the billing cycle. For instance, if you offer oil change services, you probably provide your customer with static cling reminder stickers for the next oil change date. At 13 cents a piece, they are easy to overlook. But, if you service 10 vehicles per day, those cheap little stickers cost your shop $1.30 per day, $6.50 per week, $26 per month, or $312 per year. Add all the other miscellaneous shop supplies your technicians use on a daily basis, and your bottom line can easily take a big hit. Charging for miscellaneous shop supplies ensures that those items are always covered, and the shop is not losing profit by replacing these items without compensation.
Putting The Knowledge To Use – Your Action Plan
Now that you have a solid understanding of the potential pitfalls and difficulties involved in calculating profit margins and markups, you have the power to establish accurate pricing for your business.
Ultimately, the more you are able to accurately track the expenses associated with your inventory and labor force – and determine an appropriate profit margin for those goods and services – the more empowered you will be to improve the income for your company. Keep accurate records, track your expenses, price your goods and services accurately, and your shop will be positioned to outlast the competition.
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