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Set higher labor pricing and sell value for a home run in increased profits

Editor’s note: This is the first installment of a multi-part series, “Workflow to Cashflow,”  by Dave Schedin, of CompuTrek Automotive Coaching & Training, who has more than 40 years in the automotive field and has coached shops to higher profitability since 2006.

Which came first, the chicken or the egg? Workflow or cashflow? Neither! Workflow implementation means nothing if it’s not heading toward your cashflow target, and cashflow is meaningless if your workflow never reaches its target.

Dave Schedin

Unfortunately, most shops begin with the “DO-ingness” (workflow) of running a shop with only “ballpark” profit goals of what they think it takes to be profitable. Profit is not cashflow. More on that later in this management series.

I can say in my lifetime it’s been gratifying to have warmed a seat in a major league ballpark stadium. The reality, however, is they were nosebleed seats and nowhere near seeing home plate clearly, though they were still considered to be “in the park.”

“Ballpark” thinking has the real potential to keep you speculating as a spectator of your business, i.e. nosebleed seats, but not in a premier seat eager to produce tangible results and cross home plate for the win.

Lesson No. 1: If you’re going to be in the ballpark, at least be in the infield.

Most shops “sell” parts and labor with dollars attached to it as their value. However, what customers really want to buy is peace of mind. We absolutely need to talk about parts, labor, sublet, tires, etc., however, price is not the focal point — but we still need to set pricing to be profitable and then use value words and reasonings in alignment to the pricing that you’re presenting.

Lesson No. 2: The number one “inventory” item a shop sells is labor. Let’s look at a few things to consider when creating or increasing labor rates. This general order listed below is just that. It only becomes definitive in its order as the marketplace changes and values or priorities shift. It’s not a complete list of all the thinking that goes into labor rates, but it’s enough to get you started.

  1. Set your labor rate(s) to be profitable based on your most expensive tech and labor GP percentage goal. Your labor GP percentage goal should be high enough to cover hourly paid techs even when they are not producing (i.e. a tech is paid eight hours but only produces six, but you still have the cost of eight hours. CompuTrek can help you determine this, and seven or more other criteria, in forecasting sessions where we’d dial in the labor rate that is needed specifically for your shop to create your labor home runs.
  • Your customer data base acclimates to “dollar value” based on the value expression you use. When businesses increase their rates without raising their value expression, they can come across as expensive and customers question whether it is worth continuing to do business with you. It can feel incongruent to them. While marketplace labor rates carry a value (see below), upon increase you will need to be strategic, especially if you have been much lower than others in the marketplace. To bring yourself up to par, try increasing your rate in small increments (i.e. $3-5 every six to nine months to arrive at the marketplace average. This way, you may not ever need to have a defibrillator on hand or lose customers because of increase.
  • About that marketplace pricing. This, in my mind, is the last criteria to use in determining your labor rate. It does have much more value if you are substantially underpriced, such as $5-7 or more under. Be careful of hearing only a few places that have higher rates and guessing everyone else is the same. CompuTrek has a Labor Rate Study excel worksheet that encourages you to complete at least once a year. As you fill in the worksheet you get to see the actual trends in your area and the percentage of climb happening. *

Typically, I do not suggest an increase of more than about $10 when changing your rates because at the same time, you will find it necessary to raise your customer value expression more than ever and “assign responsibility” for higher costs on the high-tech vehicles, the engineers who designed their vehicles and government mandates and taxes on small businesses for creating the need of today’s seemingly higher priced costly repairs.

The upside of watching shops raise their rate as much as $12-15 has its fruit, especially because they can easily weed out lowest-price-point-only customers, who rarely bring loyalty but are effective at swallowing up valuable time at the counter while lowering car count. There is a value to allowing your pricing and quality to “fire” those who truly are not your customers. Have marketing in place when you choose to make big jumps because your new customer doesn’t know you just raised your prices and see it as normal. Create a rewards program that takes the edge off of price-conscious customers and help build loyalty.

All stages of service advisor interaction — from phone greeting, appointment making, initial writeup, follow up sales calls and, most importantly, the final “active delivery stage” — needs to have embedded a very high level of value words and reasonings that contributes to your customers peace of mind.

Lesson No. 3: Finally, try to set your labor rates with a third party who typically will not have the same fear of raising them. Fear is one of the biggest enemies of a successful auto repair shop. To some extent, we all have some level of fear in this area or we’d all have $200-300 labor rates and really get paid for what we’re worth in serving our customers and their vehicles well.

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* Forward this “Aftermarket Matters Weekly” to another shop and cc Coach Dave (email below). CompuTrek will email you the Labor Rate Study Excel Workbook, described above, at no charge.

Next from Coach Dave in the Workflow to Cashflow Series: Part 2 – Parts Pricing Strategies. Dave Schedin can be reached at 800-385-0724, dave@computreksystems.com, and www.computreksystems.com. A complimentary 30-minute discussion is available for the asking.

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