Many Shops Have Raised their Labor Rates, But Still Struggle!

[Joe Marconi]

As a former shop owner turned business coach, this is a topic that I see often: A shop takes the time to establish their true labor rate, and in many cases, raises their labor rate significantly.  While they get a short-term boost in labor profit, the long-term results are mediocre, at best. Why?

One of the reasons is that the cost of doing of business has also increased, along with payrolls, and in many cases, at a faster rate then the rising labor rates. And then there is the issue with poor productivity. 

Has this happen to you and what are your strategies to maintain needed profits? 

[Transmission Repair]

I learned a lot by simply doing a YouTube search on "auto repairs cost more".  Here's the best video I found, on CNBC.  13:43  Why Car Repairs Are Getting So Expensive  In my opinion, the reason shops are struggling is that they aren't including Hidden Costs in their calculations.  It has been my experience that most shops set their prices off of competing shops in the area, not off of their true costs.

You can either do a Google search on "Job Costing" or read this article.  I give credit to my dad who opened up my eyes to Job Costing and Hidden Costs.  He had a saying that summed it all up pretty well... "How the hell do you know what to sell something for if you don't know what it costs you."

Edited November 25, 2024 by Transmission Repair
Added the last paragraph.

[Transmission Repair]

Speaking of shops experiencing an uptick in labor costs, has anybody allowed for bonuses?  What about a holiday (Thanksgiving, Christmas, etc.) bonus?  What do you consider if and when a bonus is warranted?

Has anybody noticed the massive layoffs and businesses that are closing locations?  I don't understand why shipping companies are laying off a lot of employees at the busiest time (holidays) of the year.

[Joe Marconi]

On 12/1/2024 at 4:27 PM, Transmission Repair said:

Speaking of shops experiencing an uptick in labor costs, has anybody allowed for bonuses?  What about a holiday (Thanksgiving, Christmas, etc.) bonus?  What do you consider if and when a bonus is warranted?

Has anybody noticed the massive layoffs and businesses that are closing locations?  I don't understand why shipping companies are laying off a lot of employees at the busiest time (holidays) of the year.

Not sure why shipping companies are laying off people. But, your point on bonuses is a good question. Bonuses should be tied to performance, expectations, completing certain training, and other criteria. It needs to be managed by the shop owner and/or manager, and YES, it needs to be factored into your cost of doing business. 

[juanpablo4219]

On 12/1/2024 at 3:27 PM, Transmission Repair said:

Speaking of shops experiencing an uptick in labor costs, has anybody allowed for bonuses?  What about a holiday (Thanksgiving, Christmas, etc.) bonus?  What do you consider if and when a bonus is warranted?

Has anybody noticed the massive layoffs and businesses that are closing locations?  I don't understand why shipping companies are laying off a lot of employees at the busiest time (holidays) of the year.

If your making reference to the season, at this point it's the hi season for them. The holidays is the answer. Business closing, there are so many factors.
For the shipping companies laying off, they're at their peak due to the Holidays and online orders, not laying off until after season... The purchasing habits have change a lot...
My sales for November & December had diminished a lot, nothing to compared to the previous months. My thoughts for this year, "Black Friday turn into Black November" The Black Friday sales started early in November and not in the Black Friday, therefore people spending on gifts and specials for the holidays. Once we got to the Thank Giving week, the consumer buy food and kids are out of school, so their funds go to the groceries store.
The auto shops are empty since the consumer does not consider their car well being since it runs, if it does not run then they'll consider doing something about it... it's an uphill battle. and Yes, I have been advertising even more, with very little outcome.

 

[weighit]

I may have done it all wrong when I owned the last service business in figuring my true costs, but this is what I did. Took every single expense that we had for the entire year, everything from taxes, materials payroll, utilites, advertising, damages. Tried to not miss one thing and got a total. Then counter every single hour worked in the shop, if I or any employee was there, it got counted as worked hours. Didived that and got my true cost to have the business by hour opened. So I knew what I was having to bring through the doors to be open and break even. Knowing that I knew to make a profit, or I should say to make the profit I wanted I then knew how much over that dollar per hour rate I needed to make, on every hour we were working. Right or wrong it kept me on my toes and we did make a decedent profit every year.  It also let me know how much every year to raise my prices to keep my profit where I wanted it.

[Transmission Repair]

I don't think there is only 1 way to calculate a shop's costs, etc.  I see shops setting prices based on the prevailing competition more often than any other method.  I was a transmission technician at a local Chevrolet dealer in the early '80s.  Unknown to me at the time, I received a great job costing lesson that really opened my eyes.

A new car dealer has many revenue streams, including parts, new cars, and used cars. Most shops have only 1 or 2 sources of income.  I quickly learned that we HAD TO have a higher labor rate than any dealership.  It took me at least 6 months of constantly editing our costs because as soon as I thought I was done, I'd discover a new cost that I hadn't thought of before.  One killer hidden expense is core handling.  We were constantly handling high-dollar transmission, transfer case, or differential cores.  For example, when we buy an Allison transmission for a medium-duty GM truck, the core price alone could surpass the price of the Reman unit.  GM provided "core management training" for the parts guys.

Look at all the cost increases due to supply chain issues and/or inflation.  If you think it's bad now, wait until Trump gets in office and starts slapping tariffs on imported parts.  We might as well start buying tickets to the circus because that's what will seem like what is happening.  Many shops, owners, and managers have a hard time selling for top dollar, but that's what it's going to take to be successful now and beyond.  

My advice would be to start with a living document (spreadsheet) of all the costs you know.  When another new cost pops up, merely add it to the list.  Keep doing that to the point where you feel like you've finally captured all your costs.  Even then, some other new cost you've never thought of before will surface.  Lastly, don't be afraid to be significantly higher on your labor rate than the dealer.

Larry in Draper, Utah   [email protected] 

[Joe Marconi]

14 hours ago, weighit said:

I may have done it all wrong when I owned the last service business in figuring my true costs, but this is what I did. Took every single expense that we had for the entire year, everything from taxes, materials payroll, utilites, advertising, damages. Tried to not miss one thing and got a total. Then counter every single hour worked in the shop, if I or any employee was there, it got counted as worked hours. Didived that and got my true cost to have the business by hour opened. So I knew what I was having to bring through the doors to be open and break even. Knowing that I knew to make a profit, or I should say to make the profit I wanted I then knew how much over that dollar per hour rate I needed to make, on every hour we were working. Right or wrong it kept me on my toes and we did make a decedent profit every year.  It also let me know how much every year to raise my prices to keep my profit where I wanted it.

I think you method gave you an insight on the true costs of what it takes to operate your business. There are other methods. One thing to add, while know what the costs are for every hour you are open is crucial, add an additional amount for profit. This would give you a number to shoot for to pay your expenses, and for profit. Just a thought.