It’s Your Business
- Author: Terry Greenhut, Management Editor
Using formulas can help shop owners make sure they price jobs profitably
Pricing jobs in the transmission- and auto-repair business has always been a complex issue. Coming up with a labor rate and a parts markup that make sense and are applicable in all situations is almost impossible. There are too many variables to consider.
Some shops price parts on the basis of a certain gross-profit margin (GPM) they think will work in all instances, but it won’t, so then they have to play with the numbers to make them come out right. When it comes to labor they tend to lock themselves in at a certain rate for a long, long time. Some have different rates for work done by “A,” “B” or “C” technicians; others charge by whether they are working on a domestic, foreign, computerized, all-wheel-drive, truck or whatever, but that can get to be a bookkeeping nightmare and at the same time make customers quite suspicious about their pricing.
As I watch the gasoline prices changing every day, sometimes several times in one day, it makes me wonder whether we shouldn’t be changing our prices a lot more often to keep up with our rising costs. When those pump prices change, so does your cost of doing business. Your parts prices go up, shipping charges increase, gassing up the shop vehicle costs more and your employees’ commute to work will be more expensive, which may mean having to give them a raise to help them keep up.
The pump prices go up in direct relationship to how much the station paid for its last load of gasoline. There is no waiting to see what the competition will do or whether the price might come down on the next load. They raise the price and we pay. Not only do our parts prices go up because of increased fuel expenses adding to the cost of manufacturing and shipping; everything does.
You, on the other hand, probably absorb many increases in items you buy and in the wages and benefits you pay before you make yourself believe that you have to start charging more. Then the question always arises, “How much more?” What will I need to get on a regular basis to come to a livable figure? Will I need $75 an hour and a 60% GPM on parts? How about $80 an hour and 67%? How long will those numbers be profitable?
A good friend of mine, who has been in the auto-care business for more years than he’d like to admit, is a student of the industry. He attends business and technical seminars several times every year. His goal is to learn as much as he can and apply it to his business. He is a member of two different twenty groups (groups of about 20 shop owners who meet in various cities several times a year to discuss business and learn from each other). According to him, the issue of pricing has come up many times. Is it better to charge for the labor time and the parts separately, or should you just lump it all together and quote a total price to perform the service or repair? If you charge labor by the hour and you’ve reached the magic $100-an-hour mark, is it better to charge by the half hour so as not to scare customers to death?
With the price of everything being so high and with more service centers performing “while you wait” repairs and services, are more customers timing our technicians to see how fast they complete a job compared with the number of hours being billed? Think about it. You’re a customer sitting in a waiting room while your car is being worked on. You have nothing better to do than check your wristwatch every few minutes. Do you think you might compare the actual time the job took with the hours you are being billed?
If we want an alternative to pricing parts and labor separately on the repair order and want to ensure that we always make the amount we need on each job, we have to have a way to figure the gross profit for the entire job at the time we price it, not a fixed rate for the labor and a fixed markup on the parts. Then all we need to know is how much gross profit we will need on the basis of our fixed costs and the net profit we want to make. In other words, after taking out our cost for the parts and labor, which leaves us with our gross profit, how much of that is needed to pay the rest of the bills and make a net (bottom-line) profit?
The formula to figure gross profit is:
- Gross Profit = Selling Price – (Labor Cost + Parts Cost)
When pricing a job you can make sure you reach at least 58% gross profit (the percentage the twenty groups have agreed is profitable for most of its members) by doing the following: First, figure out how much the technician who is going to do the job costs you each hour.
Example: You pay him $25 an hour. Add 15% for benefits, bringing his real cost to $28.75.
Let’s say the part you are buying for a certain job costs you $100.
You look up the billable hours, and they come out to two hours of billable labor at a cost to you of $57.50 ($28.75 X 2 = $57.50)
The formula to find the selling price for the job at a gross profit of 58% is:
- (Labor Cost + Parts Cost) X 2.4 = Selling Price
Plugging in the numbers:
- $57.50 + $100 = $157.50 X 2.4 = $378.00
- The job should sell for $378.00.
To find the gross profit for the sale, subtract the cost of the parts and labor from the selling price: $378.00 – ($57.50 + $100) = $220.50 The gross profit is $220.50.
The formula to find the gross-profit percentage for the sale is:
- Gross Profit / Selling Price = Gross-Profit Percentage
Plugging in the numbers:
- $220.50 / $378 = 58.33%
- The gross-profit percentage is 58.33%.
The beauty of pricing this way is that you can instantly change the variables and it still comes out to 58%. For example, if you assigned a lower- or higher-cost technician to a job, just insert his hourly cost including benefits and the percentage comes out the same. It will work for any part price and any number of hours.
Even if you have an established hourly labor rate you want to charge, you can use these formulas to check your gross-profit percentage on every job. If you see a trend going the wrong way, you’ll know it’s time to raise your labor rate.
If it turns out that 58% gross profit doesn’t leave you with enough to pay your bills and make a good net profit, you can always increase it by using a higher multiplier. For example, 2.5 will give you about 60%.
These formulas take the guesswork out of pricing because you are applying the gross-profit percentage you want to both the parts and labor in real time. They also give both owners and managers realistic targets. It’s much easier to fight for your price when you know that you have to get a certain amount for the job. When you are only guessing, you tend to believe that if you have to take a lower price because the customer wants to negotiate it’s somehow OK. It’s not OK. It’s never OK, because you are giving away the net-profit dollars that you work so hard to make.
For many decades our industry has set its prices a certain way. It might not have yielded us the right prices, but it was how our predecessors did it, so it’s how we learned to do it. Some of it worked well in times when inflation didn’t change our costs every other day, but that was then. Now we need to stay right on top of our costs and our pricing all the time. Change can be good if we keep up with it.