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Raising Labor Rates and Prices May Not Achieve Profitability


Joe Marconi

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Most shop owners would agree that the independent auto repair industry has been too cheap for too long regarding its pricing and labor rates. However, can we keep raising our labor rates and prices until we achieve the profit we desire and need? Is it that simple?

The first step in achieving your required gross and net profit is understanding your numbers and establishing the correct labor and part margins. The next step is to find your business's inefficiencies that impact high production levels.

Here are a few things to consider. First, do you have the workflow processes in place that is conducive to high production? What about your shop layout? Do you have all the right tools and equipment? Do you have a continuous training program in place? Are technicians waiting to use a particular scanner or waiting to access information from the shop's workstation computer?

And lastly, are all the estimates written correctly? Is the labor correct for each job? Are you allowing extra time for rust, older vehicles, labor jobs with no parts included, and the fact that many published labor times are wrong? Let's not forget that perhaps the most significant labor loss is not charging enough labor time for testing, electrical work, and other complicated repairs.  

Once you have determined the correct labor rate and pricing, review your entire operation. Then, tighten up on all those labor leaks and inefficiencies. Improving production and paying close attention to the labor on each job will add much-needed dollars to your bottom line.

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Well said!  We raised our labor rate by $20 this year to $170.  May not be high enough still.  But my main issue that we're working to solve are the large leaks in the dam. We're correcting  the labor guide to more closely reflect actual times or building contingencies into our estimate to allow for us to request more labor when needed.  When communicated correctly it works. 

Then we are rounding up the labor.  Labor guide is close sometimes and has errors or is misleading at other times.   

In a class today, we discussed bumping the actual labor time by 20-30%.  Then he said to add 10% to the total and give everyone a loaner car or Uber.  

Being afraid to charge properly all the time was an expensive lesson.   We're doing way better now.   I feel like we are about 80-90% corrected.  Also, need to keep one of my techs from doing unauthorized / unsold work too.   When he gets on a roll, stop is not in his vocabulary.   We're working on this too. 

Productivity isn't an issue for us yet as I'm staffed for where I expect to be (which is overstaffed for today).  We'll be ready to manage that when it is required.

I'm happy that our profitability has grown enough to allow me and my shop foreman to attend the Vision Training Conference in Kansas City.  Today was the 1st of 4 days.  Both of us had a great 1st day!

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8 hours ago, bantar said:

Well said!  We raised our labor rate by $20 this year to $170.  May not be high enough still.  But my main issue that we're working to solve are the large leaks in the dam. We're correcting  the labor guide to more closely reflect actual times or building contingencies into our estimate to allow for us to request more labor when needed.  When communicated correctly it works. 

Then we are rounding up the labor.  Labor guide is close sometimes and has errors or is misleading at other times.   

In a class today, we discussed bumping the actual labor time by 20-30%.  Then he said to add 10% to the total and give everyone a loaner car or Uber.  

Being afraid to charge properly all the time was an expensive lesson.   We're doing way better now.   I feel like we are about 80-90% corrected.  Also, need to keep one of my techs from doing unauthorized / unsold work too.   When he gets on a roll, stop is not in his vocabulary.   We're working on this too. 

Productivity isn't an issue for us yet as I'm staffed for where I expect to be (which is overstaffed for today).  We'll be ready to manage that when it is required.

I'm happy that our profitability has grown enough to allow me and my shop foreman to attend the Vision Training Conference in Kansas City.  Today was the 1st of 4 days.  Both of us had a great 1st day!

Great comments and feedback!  You are lucky that productivity is not an issue at this time, that means that you are doing a lot of things correct.  You make a great point that many are afraid to charge what they need to charge.  I wonder if it's from fear or not truly knowing their numbers and the need to achieve a profit? 

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Joe,

I appreciate the fact that you are not just looking at the Labor Rate but also the operation as a whole. I believe we are all trying to reach a desired net profit, and how we get there involves hundreds of touchpoints. I would say that raising your labor rate is not the solution to low (or no) profitability; raising that rate is only part of the equation. 

Over the past few years, I have seen a dangerous level of arrogance creeping into our industry, a genuine threat. To achieve the actual profit we want/deserve, we must think like a CEO of a complex business. We must measure metrics throughout the process, looking for areas to cut costs and improve efficiencies. We must also listen to all recorded phone calls and perfect our technique rather than only adding more fuel. Here's a good analogy: How would a NASCAR team fare if, to win the Cup, they were hell-bent on more horsepower as the solution rather than suspension improvements, better aerodynamics, and improved traction? 

I know NASCAR governs everything, so my example is terrible, but we all get the point. Don't we?

engine.jpg

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48 minutes ago, Charlie said:

Joe,

I appreciate the fact that you are not just looking at the Labor Rate but also the operation as a whole. I believe we are all trying to reach a desired net profit, and how we get there involves hundreds of touchpoints. I would say that raising your labor rate is not the solution to low (or no) profitability; raising that rate is only part of the equation. 

Over the past few years, I have seen a dangerous level of arrogance creeping into our industry, a genuine threat. To achieve the actual profit we want/deserve, we must think like a CEO of a complex business. We must measure metrics throughout the process, looking for areas to cut costs and improve efficiencies. We must also listen to all recorded phone calls and perfect our technique rather than only adding more fuel. Here's a good analogy: How would a NASCAR team fare if, to win the Cup, they were hell-bent on more horsepower as the solution rather than suspension improvements, better aerodynamics, and improved traction? 

I know NASCAR governs everything, so my example is terrible, but we all get the point. Don't we?

engine.jpg

Charlie, Yes we get the point! Great photo.  

You make great points about the current state of business. And as someone who has been in this industry since 1974, I can tell you that your words have never been more true. 

The "arrogance" you speak is the prime reason for writing this blog. Perhaps, shop owners should ask themselves, "Is my recent success directly related to what I did, or is it the benefit of current circumstances?" 

Thank you for you post! 

 

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I find it amazing that nobody specifically mentions a P&L statement.  For our shop, we would look at the Profit & Loss statement to not only know our profit margin but to also calculate labor charges and markup on parts.  We are a transmission shop that has only 4 numbers to tell us if our labor & parts are priced correctly.  For us, it works like this...              20% of sales should be parts, 20% of sales should be labor, and 40% of sales should be overhead, leaving 20% of sales as profit.  If any one of those 4 numbers is off, we either need to adjust our pricing, look at the number of warranty claims, or shop efficiency/productivity.

Those 4 numbers tell me everything I need to know about our prices and profit margin.  To me, it's not as complex as some shop owners make it out to be.  If anything is below target, we adjust our prices accordingly, start looking at shop efficiency, or look for underpriced estimates.  It's only as hard as 4 numbers and being able to rationally diagnose problems that affect our numbers.  Just look at your P&L statement.

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That's an interesting approach; I like it. In general repair, we all strive for a 60% GP, which I believe is what you are stating. I have found that P&L statements can be very misleading; the proof lives in the balance sheet and the cash flow statement. I remember when my P&L looked great, but I never had enough cash to pay taxes on April 15th; where did it go?

Going back to Joe's point: "The first step in achieving your required gross and net profit is understanding your numbers and establishing the correct labor and part margins. The next step is to find your business's inefficiencies that impact high production levels." Net profit is what we are after; it is what we need in order to grow our business. To have a great business, one that is sustainable, we are constantly refining our process and looking for intelligent opportunities. 

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You're right, 60% gross profit is what we're after, and 20% net profit.  We didn't have a problem paying taxes because we included it in our overhead expenses to keep from spending it on something else.  Nothing produces stress like unknowingly spending tax money on something else.  We were $125/hr. on labor (2015, highest in our market area of SLC, UT) and 100% markup on transmission-related parts.  Very few general repair parts could we do 100% markup.

Lucky for me, my wife is an accountant and business partner.  One year she "rat-holed" $125K unbeknownst to me.  Another year, the state of Utah put us on monthly (not quarterly) sales tax payments because we went over the $15K quarterly threshold limit.  We were experiencing explosive growth at the time.  We were a very small (3K sq.ft.) shop with only 4 lifts, but we produced the most work of any transmission shop around. ($1.2M/yr.)  This was mainly due to the fact we didn't do general repair like the other transmission shops did.  We stuck to the big ticket repairs like transmissions, transfer cases, and differentials.  Minor work to us was transmission service jobs and most leaks.  The other variable was the high traffic count of our location.  We were right on I-15 with a daily traffic count of 235K/day.  Our front property line was only 90 feet from I-15.

We didn't have a big problem with production and efficiency mainly because I was a tool and equipment junkie.  One year I bought a valve reaming station for valve bodies.  Everybody was concerned it would slow down shop production.  Some really griped and complained loudly because it was a lot of extra work and didn't understand why I wouldn't buy valve bodies.  Three months later, everybody had warmed up to the idea.  Yet nobody complained when we installed an overhead ATF reel with a 50-foot hose or started buying ATF by the 330-gallon plastic totes.

I paid everybody hourly so that they would have a steady income they could depend on.  Everybody liked it that way, especially the employee's wives.  (Happy wife, happy life.)  I've since retired but occasionally miss the shop.  I thought I'd never make enough to fully retire.  Speaking of retirement, I'm like Joe in that I never made enough to retire with the sale of just the business ($330K).  I only semi-retired.  It was only after the sale of the shop's real estate ($2.3M) did I make enough to fully retire on.  I first learned this from Joe and he's absolutely correct, at least that's my experience.

Edited by Transmission Repair
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I have to add about our labor times.  In a transmission shop environment, it was really unusual for somebody not to beat the billed hours time.  That goes for both the build time and the R&R time.

As an example, if a technician works 40 clock hours, the billed hours usually ran somewhere in the range of between 50 to 60 hours.  That's between 120% and 150% efficiency.  Technician efficiency was not something I worried about and rarely checked.  New recruits were the only technicians who couldn't do better than billed hours.

The biggest problem I encountered with technicians was attitude-related.  One bad apple can turn into a cancer.  That happened to me once with two new hires.  Perhaps I'll post the letter I wrote to one of them sometime.

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13 hours ago, Transmission Repair said:

I have to add about our labor times.  In a transmission shop environment, it was really unusual for somebody not to beat the billed hours time.  That goes for both the build time and the R&R time.

As an example, if a technician works 40 clock hours, the billed hours usually ran somewhere in the range of between 50 to 60 hours.  That's between 120% and 150% efficiency.  Technician efficiency was not something I worried about and rarely checked.  New recruits were the only technicians who couldn't do better than billed hours.

The biggest problem I encountered with technicians was attitude-related.  One bad apple can turn into a cancer.  That happened to me once with two new hires.  Perhaps I'll post the letter I wrote to one of them sometime.

Do you think the reason for high productivity and beating the labor time is due to becoming very proficient in a particular area and skill set? As in your business model?

In the "Most Car Makes, Most Car Models" world that I operated in, over the years it became more challenging to beat the time. For example:  A tech's first car for the day is a Check Engine light problem on a Buick, then an ABS issue on a Lexus, and then a climate control problem on a Volvo.  To be proficient in this environment is challenging, at best. 

Thoughts, comments? 

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2 hours ago, Joe Marconi said:

Do you think the reason for high productivity and beating the labor time is due to becoming very proficient in a particular area and skill set? As in your business model?

In the "Most Car Makes, Most Car Models" world that I operated in, over the years it became more challenging to beat the time. For example:  A tech's first car for the day is a Check Engine light problem on a Buick, then an ABS issue on a Lexus, and then a climate control problem on a Volvo.  To be proficient in this environment is challenging, at best. 

Thoughts, comments? 

There are multiple reasons for the seemingly high productivity.  We would do the same repairs day in and day out.  A technician can't help to get more proficient over time.  Unlike G/R, we didn't do very many 1-off repairs.  I trained my counterperson or manager to spot difficult jobs and 1-off repairs.  It was a collective mindset of everybody in the front office.  The most 1-off repairs we would get were the HD/High-Performance jobs in a chipped vehicle.  Some novice would chip their truck/car and the first thing it affects is the transmission because it can't handle the extra power.  Those types of jobs took much more time and had a high probability of us seeing the vehicle again under our warranty.  I would increase billed hours by 2 or 3 times to cover the extra time and risk involved.

A "nearby competitor" on jobs like those was ATS in Colorado.  They sold a lot of units that would occasionally come into our shop.  Their prices didn't include installation or fluid.  Check out this unit for a Dodge Ram diesel:   ATS 68RFE Diesel 

Another, but less apparent reason was our production contest.  We had a shop meeting during the lunch hour every Tuesday where we supply lunch.  During that time, I would write hourly labor totals on the whiteboard for each employee.  Although they were paid by the clock hour, we kept a total of billed hours for each employee.  There was no "prize" for winning other than the prestige the winner would enjoy for the week.

Lastly, we had a very well-equipped shop.  The three high-performance pieces of shop equipment we had were 1. Nustar car pusher.  2. Ten FWD car dollies.  3. Ten FWD engine hangers.  Other small things increase productivity, but their impact was too small to mention.

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On 3/5/2023 at 12:01 PM, Joe Marconi said:

Do you think the reason for high productivity and beating the labor time is due to becoming very proficient in a particular area and skill set? As in your business model?

In the "Most Car Makes, Most Car Models" world that I operated in, over the years it became more challenging to beat the time. For example:  A tech's first car for the day is a Check Engine light problem on a Buick, then an ABS issue on a Lexus, and then a climate control problem on a Volvo.  To be proficient in this environment is challenging, at best. 

Thoughts, comments? 

I agree with you, in too many markets it is very hard for a shop to specialize.  In fact, in my town there are no strictly transmission shops anymore.  The only one that even advertises "transmissions" is a general repair shop that started off as a transmission only shop and then had to expand their services.  We have 3 "import specialty" shops and only one is truly import only with another having a very high percentage being "European" imports and the 3rd is now pretty much a G/R shop.  In Northern Michigan Subarus are a big deal and there is a Subaru only shop but as for single make or "sister" makes like Honda/Acura, Toyota/Lexus, etc. there are none.  All others are G/R shops because that is all the local market will support.

 

Even when the customer goes to the dealer sometimes that level of specialization isn't enough to solve their problem.  Sometimes "Most Car Makes, Most Car Models" comes in handy too.  I had a Lexus RX come in for a "lack of power" complaint.  They had taken it to two different independent repair shops and "the dealer" (I think it was actually a Toyota dealer) and no one could figure it out.  It would sometimes bog down and have no power taking off and when you were coming to a stop it would sometimes act like the brakes went out.  Those were the customer's explanations.  I think most experienced techs will have a very good idea of the root problem. I am a one man shop and I shuttled the customer and her attendant to a nearby coffee shop in the customer vehicle.  I pretty much knew the cause before we got to the coffee shop.  This was a Lexus but most of the "Most Car Makes, Most Car Models" shops have encountered the GM trucks and their false ABS activation issues.  A review of the WSS signals just like with the GM trucks proved that one of the front WSSs was slow to start a signal and early to drop to zero thus confirming the lack of power was traction control and the "brakes go out" feeling was the ABS activating.  Why the dealer didn't figure it out is beyond me,  but I had the entire diagnosis completed with two test drives and a brief inspection on the hoist.  The customer thought I was a genius because I figured out what 3 other shops could not.  All because I am a "Most Car Makes, Most Car Models" shop.

But you are 100% correct that as a "Most Car Makes, Most Car Models" shop, I am often not as productive as I could be if I dealt with just a few highly repetitive jobs.  But that is the state of the local economy, too few opportunities to specialize and survive.

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27 minutes ago, TheTrustedMechanic said:

I agree with you, in too many markets it is very hard for a shop to specialize.  In fact, in my town there are no strictly transmission shops anymore.  The only one that even advertises "transmissions" is a general repair shop that started off as a transmission only shop and then had to expand their services.  We have 3 "import specialty" shops and only one is truly import only with another having a very high percentage being "European" imports and the 3rd is now pretty much a G/R shop.  In Northern Michigan Subarus are a big deal and there is a Subaru only shop but as for single make or "sister" makes like Honda/Acura, Toyota/Lexus, etc. there are none.  All others are G/R shops because that is all the local market will support.

 

Even when the customer goes to the dealer sometimes that level of specialization isn't enough to solve their problem.  Sometimes "Most Car Makes, Most Car Models" comes in handy too.  I had a Lexus RX come in for a "lack of power" complaint.  They had taken it to two different independent repair shops and "the dealer" (I think it was actually a Toyota dealer) and no one could figure it out.  It would sometimes bog down and have no power taking off and when you were coming to a stop it would sometimes act like the brakes went out.  Those were the customer's explanations.  I think most experienced techs will have a very good idea of the root problem. I am a one man shop and I shuttled the customer and her attendant to a nearby coffee shop in the customer vehicle.  I pretty much knew the cause before we got to the coffee shop.  This was a Lexus but most of the "Most Car Makes, Most Car Models" shops have encountered the GM trucks and their false ABS activation issues.  A review of the WSS signals just like with the GM trucks proved that one of the front WSSs was slow to start a signal and early to drop to zero thus confirming the lack of power was traction control and the "brakes go out" feeling was the ABS activating.  Why the dealer didn't figure it out is beyond me,  but I had the entire diagnosis completed with two test drives and a brief inspection on the hoist.  The customer thought I was a genius because I figured out what 3 other shops could not.  All because I am a "Most Car Makes, Most Car Models" shop.

But you are 100% correct that as a "Most Car Makes, Most Car Models" shop, I am often not as productive as I could be if I dealt with just a few highly repetitive jobs.  But that is the state of the local economy, too few opportunities to specialize and survive.

Thank you for the added perspective.  I think that for most All Makes All Models, the business model will have to continue to evolve. There is nothing wrong with it, and it kind of makes sense. Think about this: There are pediatricians, surgeons, radiologists, Internists, psychiatrists, etc. BUT they are all called Doctors.  Specialization, to some degree, will come. 

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23 hours ago, TheTrustedMechanic said:

I agree with you, in too many markets it is very hard for a shop to specialize.  In fact, in my town there are no strictly transmission shops anymore.  The only one that even advertises "transmissions" is a general repair shop that started off as a transmission only shop and then had to expand their services.  We have 3 "import specialty" shops and only one is truly import only with another having a very high percentage being "European" imports and the 3rd is now pretty much a G/R shop.  In Northern Michigan Subarus are a big deal and there is a Subaru only shop but as for single make or "sister" makes like Honda/Acura, Toyota/Lexus, etc. there are none.  All others are G/R shops because that is all the local market will support.

 

Even when the customer goes to the dealer sometimes that level of specialization isn't enough to solve their problem.  Sometimes "Most Car Makes, Most Car Models" comes in handy too.  I had a Lexus RX come in for a "lack of power" complaint.  They had taken it to two different independent repair shops and "the dealer" (I think it was actually a Toyota dealer) and no one could figure it out.  It would sometimes bog down and have no power taking off and when you were coming to a stop it would sometimes act like the brakes went out.  Those were the customer's explanations.  I think most experienced techs will have a very good idea of the root problem. I am a one man shop and I shuttled the customer and her attendant to a nearby coffee shop in the customer vehicle.  I pretty much knew the cause before we got to the coffee shop.  This was a Lexus but most of the "Most Car Makes, Most Car Models" shops have encountered the GM trucks and their false ABS activation issues.  A review of the WSS signals just like with the GM trucks proved that one of the front WSSs was slow to start a signal and early to drop to zero thus confirming the lack of power was traction control and the "brakes go out" feeling was the ABS activating.  Why the dealer didn't figure it out is beyond me,  but I had the entire diagnosis completed with two test drives and a brief inspection on the hoist.  The customer thought I was a genius because I figured out what 3 other shops could not.  All because I am a "Most Car Makes, Most Car Models" shop.

But you are 100% correct that as a "Most Car Makes, Most Car Models" shop, I am often not as productive as I could be if I dealt with just a few highly repetitive jobs.  But that is the state of the local economy, too few opportunities to specialize and survive.

Specializing depends wholy on your market and business location.  We were a transmission-only shop.  Big Ticket City.  However, our location enabled that thinking.  We were down the road (1.5 miles) from a huge 12-new car dealership group Auto Mall.

No matter the brand, people would go into the dealership only to hear from a dipshit service writer a return call that they needed a transmission for $XXX,X.00.  The car still drives and all 4 wheels are on the ground. The service writer hears "let me think about it" or "let me talk to my husband" or some variation thereof... and the customer starts to call around.  We're the closest transmission shop around, so they call us next.  The rest is history.

We've paid thousands, over the years, to our towing company to tow vehicles out of new car dealerships near us.  Bottom line: service advisors can't sell big tickets.  End of report.

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