AKRON (July 19, 2004) — Doing automotive repairs profitably means tailoring labor rates to specific jobs instead of charging one rate for everything, an auto service software specialist said.
In my last column, Jerry Noble urged owners and managers to concentrate on profitability instead of labor rates per se. Mr. Noble, a former technician, service writer and shop manager, worked as a tool dealer for nearly 20 years. Today he's the president of Automotive Visions, developers of Take Charge Service Management Software (www.auto-vis.com).
He argues that many auto service facilities suffer because the boss is obsessed with labor rates for the sake of labor rates. Instead, he or she should learn to think by the job. Then account for the factors that commonly affect each job's profitability. Here's why.
Mr. Noble's experience selling tools to all kinds of auto repair businesses taught him that bosses always end up charging by the job whether they realize it or not. Unless someone is charging strictly by the clock (a rarity), then they're charging by the job.
If you're ultimately charging by the job anyway, then concentrate on making a solid profit per job every time. When all's said and done, the labor rate is only one of the many factors in making a good profit on each and every job, he explained.
Meanwhile, the typical shop owner Mr. Noble served mistakenly thought he was charging by the hour.
Second, experience also shows that successful owners and managers factor the following variables into pricing each job: cost of the technician; cost of the required tools and equipment; potential parts profit on the job; and the job's risk of comebacks.
The cost of the tech, as the expression suggests, is what you pay the tech. As a rule, the greater the tech's skill, knowledge and experience, the greater his or her cost. Therefore, it makes sense to assign lower-cost techs to lower-profit jobs, higher-cost techs to higher-profit work. Some readers may ask, “How many managers would squander a skilled tech's talents on oil changes and exhaust jobs?” Based on my field experience, more than you'd care to know!
The cost of tools and equipment for a job is often overlooked. On one end of the spectrum: an oil change requiring a box wrench and an oil filter wrench. At the other end is driveability diagnosis requiring up to $20,000 in scanners, oscilloscopes, etc.
Similarly, there's a wide range of potential parts profit among the various repair jobs. The parts profit on a minor task may only be a buck or two vs. several hundred dollars on a large job. But savvy owners and managers plan for or anticipate making money on parts simply because they're entitled to make a profit on the goods they sell. (You'd better believe hospitals are making a profit on that aspirin they gave you.). In other words, parts profit is not just some accident or windfall.
When there's little or no parts profit on a particular task, smart bosses always adjust the job's labor rate accordingly to compensate for it.
As I've noted before, a straight diagnostic job is a classic example of lost parts profit. For instance, your costliest, smartest tech spends three hours diagnosing an intermittent electrical problem and solves it by tightening a loose connection. The job requires no parts at all.
The other key factor to consider is the risk of comebacks. I think this issue is particularly timely for tire dealers simply because so many tire dealers have expanded their services so much within the last 10 years.
On the one end of the risk “scale” is a routine brake job the dealership's techs perform every day. They have the task down pat so there isn't much risk of a comeback.
But as this same dealership expanded into ABS, electrical and driveability diagnosis, the crew learned that the risk of comebacks on these troubleshooting tasks is drastically greater. Unfortunately, I haven't met many bosses who factor in the risk of comebacks whatsoever. Considering the complexity of today's vehicles, I would make it standard practice because even the best technicians make mistakes.
To recap: The costlier the tech needed to do the work, the higher the labor charge should be. The more equipment required to do the work, the higher the labor charge. The fewer the parts required, the higher the labor should be. The greater the risk of comebacks, the higher the labor rate.
Factoring in these variables will build your bottom line faster than you imagined, Mr. Noble said.