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The model that I am familiar with is a 60% gross profit on loaded tech wages. Loaded would include all taxes, workers comp insurance, benefits like health insurance, dental insurance, vacation pay, holiday pay, training costs, retirement contributions etc.

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I would set your labor rate at 3.5x the highest paid tech. So as an example Joe tech makes $20/hr, you should charge $70. I've been using this strategy and it has worked out well. If you are just starting out anticipate what the techs pay will be in 24-36 months and use that figure. You don't want to keep changing your posted labor rate.

 

Parts gross profit margin (ignoring labor) needs to be close to 50% on average. Your chart above is great. Remember profit margin and markup are different. To achieve 50% GPM you would markup your part 100% or cost x 2.

 

I use the labor multiplier because it simplifies things, a tech that earns $20/hr probably costs $30/hr when you figure in all the expenses of not only insurance and taxes but soap, gloves, shop supplies, mistakes that cost you money. Its also important to charge for his/her time. The book might call for 1 hour to do a hub bearing, if he's hammering on it for 2 hours charge 2 hours. It seems simple but I hear owners crying all the time they can't make any money.

 

In the above example say your a nice guy, you charge 1 hour for a bearing and 50% on the part. Its your good customer so you throw him a 10% discount and use a cheap bearing. The part cost you $100, you charge $270 for the job. With the discount you got paid $243. Customer is very pleased. Minus $60 tech cost. Minus $100 for the part. Your shop made $83 on the job, assuming it took 2 hours that's basically an effective rate of $41/hr to pay overhead. If it costs $40/hr to keep the open sign on you made zero for yourself. The bearing fails under warranty 10 months later, customer is shaken up and is angry he paid over $200 and has the same problems. The labor time your not getting back and you also lose 2 additional hours to work on a new job so now it ended up costing you money to do that job. Nice guy 10 months ago is now the bad guy.

 

Let's revisit that same job. You insist on a OEM bearing or equivalent. $200 cost for the part, 2 hours labor. Now the job is $540. You need to present to the customer some valid reasons to justify charging this amount. It still takes the tech 2 hours. You still kept the open sign lit for 2 hours and paid your counter man. You made $280 or $100/hr money you actually keep*. The chance of failure under warranty is greatly reduced. The customer has long forgotten what he paid to get his car fixed because its still fixed. You are the nice guy now, really.

 

* after all expenses you might cut this number in half or worse.

 

Its important to have good percentages, but real money is what pays real bills and earns you a living. Every job needs to be scrutinized to maximize the real dollars earned, don't discount yourself out of business.

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  • 3 weeks later...

We begin our estimating process by looking up the times in the national labor guide as published in our Mitchell software. The settings automatically bump the charged time by 33%. We setup a default that automatically assigns every generated labor line to a tech named Tech Assign. (It shows up as Assign, Tech) and that technician assigns costs to the job (as alfredauto suggested) by a calulation based off our highest paid technician's loaded payroll cost. We actually use a bump in that calculation also which helps to protect our bottom line against a techncian who is less than efficient on any particular job.

 

So, by this explanation, a job that takes 2.5 hours according to the guide (with all combinations & consideration for any overlapping service), is charged to the customer at 3.33 hours. Here's what happens:

 

Let's say that Joe, our highest paid technician, earns $23 per hour, flat rate. So of course, Joe's rate in the technican's setup screen indicates that he will cost $29.90 per billed labor hour with estimated taxes, workers' comp fees, etc. added in. The default technician, "Assign Tech" is also setup this way. The software suggests charging the customer 3.33 hours, or the amount of time in the guide multiplied by 133%. The default tech is given 2.5 pay hours, the customer is charged 3.33. Once the job is assigned, no matter which technician is paid for the job, the nature of the profit margin as it pertains to the associated labor costs can't change in a manner as to cause us to lose money on the job. In fact, if it's ultimately assigned to a tech that earns $17 flat rate (or $22.10 loaded), the additional $25.97 collected in labor fees is essentially unassigned, and bolsters the profit margin originally written in the estimate. Fair? Absolutely! If a less experienced tech is assigned a job, and has any struggles with it, our more senior staff is always happy to help, even for a few minutes to help get them past a difficult point, because the company can generously afford to pay that tech the additional time, ON TOP of what the assigned tech is earning, because it's a built-in contingency.

 

It also gives us a very powerful advantage...ANYtime one of our technicians runs into a problem on a job that was unforseen, or requires additional effort or steps to complete the work, our staff can, at their discretion, request additional time on a job, and given that our effective labor rate weekly is generally higher than our posted rate (due to all the calculations above) we can almost ALWAYS give that time generously to our staff and encourage them to continue to do the best they can, taking their time, and not cutting any corners...without going back to the customer for more time/money.

 

Our parts matrix is a simpler assessment. We generally try to get a 100% markup or greater, representing a 50-60% profit margin on the parts. Now of course, in all fairness to our customers, we can't rely on the software to tell us what to charge without first assessing a completed estimate and diligently making sure the total estimated cost represents a fair price. Anytime there's any question about whether our price is competitive, our service advisors are encouraged (BEFORE presenting the estimate to the customer) to check some of the various publicly available resources such as AutoMD, or RepairPal to see how we size up. All in all, we tend to average a gross profit margin of between 60-64% on the written estimates weekly.

 

We've learned that it's a MUCH better proposition to charge much more than the discount/hack shops, and only nominally more than the reputable shop. In any given set of circumstances, it frees us up to always be ready and willing to give back to our customers when it's truly warranted, or even toss in some free, ancillary services on the visit, or on repeat visits.

 

Just one man's opinion.

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stowintegrity, how do you tech pay rate compare to your posted hourly? I like your idea however I feel that you would have to be working with a lower posted hourly to justify a 33% matrix markup on your labor rate to stay competitive with automd and repairpal quotes.

The lowest profit margin on one hour of labor, with the bump, as I called it, is about 70%, as our posted discount rate is $80. The important factor, though, is that while we answer the question regarding what our "rate" is freely, we don't sell hours, or time. Heck...sometimes it feels like we don't even sell parts...we sell solutions to problems.

 

Here's a completely hypothetical situation: If the going rate for a brake job in town is $150, and the range indicated on Repairpal is between $120 and $200, anything inside of that range is understandable. However, what if I told you (up front) that in order for us to do that job, we would have to charge $250, that the parts are all warrantied for 3 years, 36,000 miles, and that although it will take a day or so to finish it, we can offer you a brand new 2015 car to drive for the day at no additional charge, and this service package comes with a gift card for lunch at Subway? I'm making this up, of course, but my point is that price is truly only ONE consideration as to why they should do business with you. Instead of figuring out how to come down to "match" the competition's pricing...figure out how to stand up, and offer more to your customers. You'll build loyalty that your competitors will be unable to infiltrate/steal.

 

We offer one of the most valuable selling propostiions in our market, founded on the way our customers are treated, and are continuing to seek out over-the-top methods of earning their continued loyalty. I know I'm off topic now, but pricing, service, & offering...it's all connected. If they want a cheap price, I smile, shake their hand, and promise them that if they look around, I know they'll find it. It's a beautiful thing when you can know your intended market so well that it becomes easy to identify when someone you're trying to help just doesn't fit the mold. Stop wasting time & money worrying about trying to fit square pegs into round holes. It's expensive, frustrating, and not as profitable. The ONLY time it's more profitable to approach this any differently is if you happen to be the cost/price leader in town. And even if you are, it's a fragile mountain of gold you're sitting on.

 

Just one man's opinion.

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Thanks for your post. I agree with you in terms of offering value other than price in considerstion for our services. We are almost always higher than the highest "average" estimate according to repairpal. My question to you was directed to how you justify keeping up with a 70% profit margin in ratio to tech pay. My labor rate currently is 116.97 however I will be bumping it up to 119.97 to keep up with offering my technicians competitive pay while keeping our margins. I like the idea of using a multiplicative for the customer rate while keeping the "posted" rate competitive. I will have to do some math with my numbers.

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My question to you was directed to how you justify keeping up with a 70% profit margin in ratio to tech pay.

 

My labor rate currently is 116.97 however I will be bumping it up to 119.97 to keep up with offering my technicians competitive pay while keeping our margins.

I'm not sure what you mean, I'm sorry, (but I think you & I are in agreement) Instead of starting with considering what a job may cost anywhere else, our process is reverse engineered, in a sense. Determine what you want to pay your highest paid technician, then work the math backward to determine what you'll need to charge to get the margin you need. Comparing it to publicly available averages or other data is just the furtherst attempt we try to make to make certain we're being as competitive as we can. My bottom line pricing to my customers is justified by clearly stating what value they get for the services I propose. My technicians? I justify what I pay THEM, based on performance, experiences, and talent. As for the ratio between the two, I've made it no one's business but my own. (And all of you nice people, lol)

 

If your labor rate is $117, you should be able to pay your top technician as much as $33 an hour, loaded, and still keep your margins healthy, according to my application of this system. The truth lies in the simplicity of this: Profit is not a dirty word. Customers and technicians alike are universally important to my success, of course. But I further justify the ratio to both groups by letting them know that there are more bills to pay than just labor & parts. IF I can't profit according to my business' needs, I can't stay afloat...and then I'm of no service to ANYONE.

 

You sound like you have a firm grasp on this, I'd like to hear how your proposed labor change helps your numbers!

 

Tony

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stowintegrity, how do you tech pay rate compare to your posted hourly? I like your idea however I feel that you would have to be working with a lower posted hourly to justify a 33% matrix markup on your labor rate to stay competitive with automd and repairpal quotes.

He's asking the following:

If your highest tech is paid $30/hr, and your posted rate is $100/hr, you're making 70% GP on labour.

Now when you estimate jobs, you multiply the labour guide hours by 1.33, essentially charging $133/hr on the labour guide's hours.

This is now 77.5% GP on labour vs the industry standard 70%.

If your customers are willing to pay this, great! However, compared to other shops your estimates will end up being very high, especially on long/labour intensive jobs.

Have you reduced your original 70% GP to compensate for this (maybe posting $80 or $90/hr on a $30 labour rate) so your estimates aren't really high?

Like mspec, I also like the idea of using a multiplier on the labour guide, but I feel that 10-15% might be a lot more reasonable to keep your estimates within range of other shops instead of 33%?

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He's asking the following:

If your highest tech is paid $30/hr, and your posted rate is $100/hr, you're making 70% GP on labour.

Now when you estimate jobs, you multiply the labour guide hours by 1.33, essentially charging $133/hr on the labour guide's hours.

This is now 77.5% GP on labour vs the industry standard 70%.

If your customers are willing to pay this, great! However, compared to other shops your estimates will end up being very high, especially on long/labour intensive jobs.

Have you reduced your original 70% GP to compensate for this (maybe posting $80 or $90/hr on a $30 labour rate) so your estimates aren't really high?

Like mspec, I also like the idea of using a multiplier on the labour guide, but I feel that 10-15% might be a lot more reasonable to keep your estimates within range of other shops instead of 33%?

 

I see your point. I guess what's worked for us so far has been that although we use the process I've been describing to write our estimates, that in the end, I guess we do, in fact, adjust the labor $ our POS assigns if we feel the job hasn't been written in such a way as to still be able to justify the price over the value our customers are receiving.

 

It makes me wonder what mistake is made more often? Do more shops tend to undercharge, either fearfully or thinking that a low price is the best way to generate volume, or do you think there are more that error on the side of setting price too high, ignoring the value propostiion as perceived by those they hope to serve?

 

I guess I really, truly want to know that we're charging what we must in order to be highly profitable, but not so much that our customers try to lump us in with the less-than-reputable shops that price-gouge.

 

I'm not certain where I first heard it, but we've made it part of our service writer training to ask the following question: "When considering parts/labor costs passed on to our customers, how much should you charge?" The simple answer is to let the trainee know that on every estimate they should charge systematically AS MUCH as they can, minus JUST ENOUGH to make absolutely certain that our customers can't help but see the value in the offering, and are delighted to write the check.

 

This is as good as anywhere to ask the question: When considering ONLY the parts/labor equation...what is your shop's weekly goal for gross profit margin? In considering a week's worth of service completed, what's the lowest and highest acceptable margin? (Assuming you'd rather not have a service writer try to write all your service at 95% GPM, giving you a bad reputation for being overpriced)

 

Curious.

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      It always amazes me when I hear about a technician who quits one repair shop to go work at another shop for less money. I know you have heard of this too, and you’ve probably asked yourself, “Can this be true? And Why?” The answer rests within the culture of the company. More specifically, the boss, manager, or a toxic work environment literally pushed the technician out the door.
      While money and benefits tend to attract people to a company, it won’t keep them there. When a technician begins to look over the fence for greener grass, that is usually a sign that something is wrong within the workplace. It also means that his or her heart is probably already gone. If the issue is not resolved, no amount of money will keep that technician for the long term. The heart is always the first to leave. The last thing that leaves is the technician’s toolbox.
      Shop owners: Focus more on employee retention than acquisition. This is not to say that you should not be constantly recruiting. You should. What it does means is that once you hire someone, your job isn’t over, that’s when it begins. Get to know your technicians. Build strong relationships. Have frequent one-on-ones. Engage in meaningful conversation. Find what truly motivates your technicians. You may be surprised that while money is a motivator, it’s usually not the prime motivator.
      One last thing; the cost of technician turnover can be financially devastating. It also affects shop morale. Do all you can to create a workplace where technicians feel they are respected, recognized, and know that their work contributes to the overall success of the company. This will lead to improved morale and team spirit. Remember, when you see a technician’s toolbox rolling out of the bay on its way to another shop, the heart was most likely gone long before that.
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