How do you figure hourly rates?

[CARMandP]

I am getting ready to move into a new building (larger and more overhead). I have been able to work the last few years out of my own garage which has kept my overhead costs way down but my business has become to big for one of my neighbors and someone called the county on me even though I have never had any complaints from the neighbors. Oh well.

 

Of course, with the bigger building comes bigger expenses and overhead. Can anyone give me some good ideas on how to properly set my prices to not kill myself financially.

[xrac]

I am getting ready to move into a new building (larger and more overhead). I have been able to work the last few years out of my own garage which has kept my overhead costs way down but my business has become to big for one of my neighbors and someone called the county on me even though I have never had any complaints from the neighbors. Oh well.

 

Of course, with the bigger building comes bigger expenses and overhead. Can anyone give me some good ideas on how to properly set my prices to not kill myself financially.

 

My first thoughts on this is congratulations. This is evidence that you are headed in the right direction. My second thought is have you now lost your air conditioned work place that I was envying when when had a 118 heat index? As far as shop rates are concerned I would look at what I am charging compared to the competition. You can determine this with a few phone calls although AutoMD does show some shop labor rates. The most important thing is to set down and figure what your costs are and how much you will have to have to break even. Figure out how much of your gross sales are parts and how much is labor and from there you should be able to estimate pretty closely how many gross labor dollars you need to turn.

[Joe Marconi]

Congratulations! This is a big step. You will most definitely need to do cost analysis to determine what your expenses will be. This will give you a base line (your breakeven) to know what you will need to be profitable. Remember, breakeven means you’re just paying your bills, above breakeven means you’re making money. It may take a few months of tweaking before you know your true numbers. Last year when I built my new shop, I did a lot of home work projecting labor costs, fixed expenses and variable expenses, but nothing is like real life.

 

Creating a price structure plan can be a little tricky. Again it depends on your CODB (cost of doing business), payroll, market area and other factors.

Are you planning on having a grand opening? That would be a great way to jump start the new building. Maybe you can have some one-time lost leader or run a few specials.

 

In general, your part profit and labor profit needs to generate profit “dollars” to your bottom line. Do an analysis on your competition; find out what they are doing. I am not suggesting that you follow blindly what they are doing, but you need to know your competition. There is shop in my area that advertises FREE Check Engine light diagnosis, I don’t compete head to head with that but I do have ways to indirectly compete by promoting our convenience, speed of service and tech certifications.

 

Sorry to go on and on, but there is a lot to cover on this subject. Let me know if I helped and if there are any more issues or questions.

 

One thing I can tell you for sure, never compete on price, someone will always be cheaper and you will left in the dust wondering what happened to the business.

[Jeff]

MI used a formula that basicaly goes like this. Total overhead. Include everything right down to the toilet paper. Divide that by billable hours. This number is likley gonna be kinda high. Now ya average in your parts profit and the difference would be yourabor rate. Play with the numbers till they fit you business model. I recently relocated and due to the reduction in rent I reduced my labor rate a bit. It seems to have helped get more sales, time will tell. Good luck and Congratulations.

[TheTrustedMechanic]

The formulas you have gotten so far are going to be a big help. But through all of the congratulatory fluff I noticed no one mentioned the ugly side of all this. What was your labor rate? What will it have to be with the new overhead? How many customers will you lose to Backyard Bob because you are too high? You may not want to believe it but you will lose some when your rates go up, if they have to move too much.

 

I know this first hand. I was a mobile guy, I did side jobs when I had a day job. I had low overhead and low rates. I then went legit, like you are now. A very good friend and good source of leads dropped away because I was too expensive. Of the solid base I had built up and naively was relying on, I kept less than a quarter because of the mandatory higher prices. So if you aren't doning any, or much marketing now, you better figure in some serious coin to get some started, at least for the first year you are legit.

 

And I say you weren't legit because if you were working out of your home garage, in violation of zoning laws, you were no better than the Craigslisters and shadetree grease monkeys. You skirted the law and undercut the competition by not truly being competitive. Think about it, the guy three blocks over working out of his garage or the back of his Astro van will be able to cut your throat on overhead and undercut your labor rates, because he isn't playing on the same level or by the same rules (laws). I can't say I'd be happy if my neighbor started an industrial operation (that's exactly what car repair is) next to my home either.

 

But good luck in your new venture and I hope you can successfully make the transition.

[DewayneP]

I'll agree and disagree with the trusted mechanic. I sense a little animosity from him towards you because you were working out of your own garage, even though he admits he did it (mobile) before opening a shop. True, you may have skirted the zoning laws by doing that (we don't know that part of the story), but, you still had overhead. If you were working out of your own garage you still had to pay for electricity and heat, right? You did have insurance, right? You did make tool purchases to stay current, right? If you were doing it "right" you still had overhead, not like the guy working from the back of his Astro van who only took gravy jobs because that's all he had the tools and equipment for. If you are moving into a bigger shop that means more work capability, right? Can you get more cars in and out on a daily basis? If it is still only you and no employees you may not need to raise your labor rate too much. How does your rate stack up against the local shops? You will probably need to be more in line with them. More room also means you can buy in bulk. Maybe before the move you could only store oil in quarts or gallons. Now, after the move you have more room to buy oil in 55 gallon drums or more. These are the things no-one here can tell you. You will have to figure it out by doing the math. You should be able to lower your COGS enough that you won't have to compensate too much with your labor rate. More cars in and out can mean a bigger discount on parts too. Again, these are things that only you can figure out. Take my advice with a grain of salt, as I too am a guy working out of my own garage (actually my inlaws). However, I did get the zoning permits, registered with the state as a repair shop, inspection station, told the neighbors (only 1 within hundreds of yards), etc... Even though my overhead is low, I have a hard time competing with the big shots on general maintenance (oil changes, filters, etc...) because I can't buy those items in bulk because I don't go through enough of them. There are advantages to being in a bigger shop that can get more cars through. If you find those advantages you will prosper. For example, I have a one bay shop. I currently have a 2002 Trailblazer on the lift for a transmission swap. I'm waiting on the transmission to be rebuilt so I can't take any more jobs until I get this beast off of the lift. If I had 2 bays I would be able to accept more work while I wait on the other vehicle. If I had a 3 bay shop I could do oil changes and easy maintenance while the 2 other bays were tied up. That's enough for now, good luck in your new shop.

[Joe Marconi]

I am not here to judge anyone, since I know many, many great techs that started out as shade tree mechanics, I included. When I was 19 years old I started a mobile auto repair business with a friend of mine in the Bronx. We worked nights and weekends: we both had regular jobs working as techs.

 

But after realizing that I would never get to where I needed to go in business, I decided to go legitimate. I opened my own shop. That was on October 1, 1980 – 30 years ago. Those of you, who know me, know that I am a firm believer in running a business as a true business. And the better business person you are the more successful you will become. Committing to the skills of business will open more doors for and make you more money, resulting in a better life too.

[TheTrustedMechanic]

Dewayne,

I took the stance I did because of the "Poor me, I'm the victim," mentality of the OP when he wrote, "but my business has become to big for one of my neighbors and someone called the county on me." Clearly he had not followed the rules and did not abide by the law as you have done. You stated you have contacted the county, the neighbors, filed the proper paperwork, registered as a repair facility, have insurance, etc. Your only difference as you stated is that your facility cost is reduced, but then too is your capacity. So if you don't want to play by the rules (operating a business in an approved location) and someone calls you on them (files a complaint with the appropriate governing body) then you have no one to blame but yourself. But the underlying point of my missive was still valid. When he grows and evolves into a legitimate shop he will evolve into something some of his previous "customers" will not want and he won't retain them so don't count on them. So even though I was abrasive I was still providing him advice to be cautious, and offering the benefit of my experience.

 

Yes I too did the shadetree deal. But I too saw the error of my ways and went legit. I filed with the state even as a shadetree so I could legally charge for my services. I even had a sales tax license so I could mark up my parts too. Then after a series of poor dealership jobs taken by necessity I decided to open my own shop. And we can all agree, if we really were honest and took a long hard look, we all have a certain contempt for those shadetree, Backyard Bob, Craigslist grease monkeys. Many of us started there, but we all went legit. Just because we started there does not mean that it was right or just. But on the other hand, many of those (time) consumers that BYB serves aren't good customers for us anyway. Too much time involved for too little money, so in a small way they do help up by taking away many of the bottom feeders. But is still does not make it right.

[Joe Marconi]

I think for many of us, thinking like a business person is almost foreign and uncomfortable. Making a profit is often secondary to getting the job done. Our focus as technicians has wired our brains to think in terms of the mechanical side of the business. Those of us that “crossed over” and learned business skills have prospered and never looked back. Again, I am not judging here, but we would all be better off if all technicians who choose to venture into the business world run their operations like a true business.

 

AutoShopOwner.com is committed to those who seek help in learning the skills of running a business. There are many members that learned the hard way and all of us can benefit within the forums.

 

We need quality people in our industry. People in this industry are probably the hardest working group of people worldwide. Make sure you are being compensated for that.

[xrac]

I think for many of us, thinking like a business person is almost foreign and uncomfortable. Making a profit is often secondary to getting the job done. Our focus as technicians has wired our brains to think in terms of the mechanical side of the business. Those of us that “crossed over” and learned business skills have prospered and never looked back. Again, I am not judging here, but we would all be better off if all technicians who choose to venture into the business world run their operations like a true business.

 

AutoShopOwner.com is committed to those who seek help in learning the skills of running a business. There are many members that learned the hard way and all of us can benefit within the forums.

 

We need quality people in our industry. People in this industry are probably the hardest working group of people worldwide. Make sure you are being compensated for that.

 

Just today there is an article in our local paper of a guy starting a new auto repair business who say he is going to charge $45 per hour. He is a one man shop. There is a reason that the average labor rate in this area is $75.00 per hour. If this guy is that cheap on his labor he will more than likely be very cheap on his parts mark up. What he doesn't realize is that he is condemning himself to working long hours, doing without equipment, working with bottom feeding customers and a lot of junk cars, under paying himself, maybe doing without health insurance, etc. etc. etc. He will not realize the mistake until he is exhausted, burnt out, struggling to pay bills and to buy the equipment he needs but he thinks he is being smart. Obviously he believes the way to get business is to be the cheap guy. This sort of thinking is bad for him, bad for his family, and bad for this business.

[Joe Marconi]

Just today there is an article in our local paper of a guy starting a new auto repair business who say he is going to charge $45 per hour. He is a one man shop. There is a reason that the average labor rate in this area is $75.00 per hour. If this guy is that cheap on his labor he will more than likely be very cheap on his parts mark up. What he doesn't realize is that he is condemning himself to working long hours, doing without equipment, working with bottom feeding customers and a lot of junk cars, under paying himself, maybe doing without health insurance, etc. etc. etc. He will not realize the mistake until he is exhausted, burnt out, struggling to pay bills and to buy the equipment he needs but he thinks he is being smart. Obviously he believes the way to get business is to be the cheap guy. This sort of thinking is bad for him, bad for his family, and bad for this business.

 

I agree 100%. It hurts the industry too. This sort of stuff brings us all down.