Of late there has been a lot of dialogue around my circles about being paid for the value you give and bring to your customer. I recently saw a survey of shops whose sales averaged $750,000 yet their net operating profit was only 2%. That is only a $15,000 average net operating income before tax. This troubling stat begs the question: How do you continue to invest in the business and even provide a living wage for you and your team at that level of profit?
If you consider the investment you have and the hours you put in, even after your salary, all your hard work brought you a very small return on your investment. For some owners, they are happy with that because they want and have a job or even a hobby. Others are learning that a very small profit will not sustain the business and realizing that they must earn a higher net profit if they want to survive.
Profit is one of the reasons you are in business. It is the return on your investment; and yes, net profit makes your business more valuable to a potential buyer. A business coach recently mentioned that most shop owners do not realize that their business is the conduit to providing a living wage for you and your team; needless to mention a college education for your family and a nest egg for retirement. That sometimes is a deep realization that motivates owners to change and realize they need help running their business.
There is nothing wrong with asking for help. Humility is a great trait to have. Sometimes do not like to admit, that we do not have all the answers. Therefore, help from wise coaches and colleagues can be the difference in abundant success.
I would say that 98.9% of shop owners that I asked about raising their labor rate told me that they were the one who was most affected by the change. Most customers did not notice and did not even care. But raising your rate $10.00 may not be the correct move, why not $20.00? All too often you are so worried about the labor rate of the shop down the road or the dealer up the street. That is the wrong way to look at your rate. It is your value proposition to your customer that matters. Your investments in training, tools, equipment, subscriptions, facility, and marketing, benefits help establish your rate. Of course, you do need to consider your market/s income demographic.
Okay, you decide to take a very serious look at your labor rate. There are many scientific ways to figure out your new labor rate. One of them is not what the guy down the street is charging or what the OE dealers get. You have got to consider all your labor costs and review your shop’s KPIs. Find someone in your network to help you ‘yellow pad’ the numbers, there are many that will help. I can even find someone who can help you, just send me an email. (firstname.lastname@example.org)
Ask yourself if your new rate will provide a great value to your customer, even if you are the highest in your market? If your answer is yes, then it is easy to do.
In podcast sessions, we have discussed having multiple labor rates. We know that testing/diagnostic jobs in many cases do not come with a part sale. Typically, parts and labor make up 55/45 percent of every invoice. As a shop owner, you know that profits are made on parts and on labor. When parts sales are not a significant part of a diagnostic procedure, you are missing out on the parts profit unless you have a different and higher testing/diagnostic labor rate.
Recently, a shop owner posted a special (higher) labor rate on vehicles that are 25 years and older. He is in the Southwest where cars last a long time. As he came to find out, through the school of hard knocks, he was losing money on these vehicles because of the time they were spending on the repair. I can only believe that in the North where salt is used on the roads the factor jumps even higher. He did not lose one customer.
Fear seems to be the biggest reason that many shop owners do not adjust their labor rates. You will convince yourself that you will lose business. I am not saying that it may happen, but most of the shop owners that did raise their rate wonder why it took so long to do so.
You know what it costs you to do business. You are bombarded every day with price increases from services you use to run your business. There are also new marketing tools you would like to implement. There are raises and benefits to provide your people. All of that takes money. How will you ever start on the road to extreme profits unless you take a serious look at your labor rate?
Your peers have covered this topic in a great way on the aftermarket’s premier podcast. These long-form audio forums make you the fly on the wall in every conversation and give you a ringside seat in the great networking world of podcasting. I am attaching a URL that will search the site for all podcasts where we cover labor rates. Pick out a few and listen, then take the steps to a financially healthier company and you. http://bit.ly/2K9RCg2
Aftermarket Influencer And Host Of Remarkable Results Radio, Aftermarket Weekly and the Town Hall Academy Podcasts, Where the Business of the Aftermarket is Spoken.