It’s Your Business
- Author: Terry Greenhut
- Subject Matter: Shop management
- Issue: Setting rates for labor, parts
Are you charging enough? Keep on top of costs and adjust markup accordingly
19th in a series
Can you remember the last time you raised your labor rate or your parts markup? Was it last year, the year before, or possibly five years ago? Time has a tendency to slip away from all of us. Just like I mentioned in a previous article about how we promise raises to certain employees then forget to give them because we just don’t realize that a certain amount of time has gone by; the same thing goes for our pricing. We may once have figured out exactly what everything costs us and worked out the appropriate markup to allow us to make a profit, but how long ago was that? What has changed since then and how far behind are we? If you were once profitable on a certain amount of volume, and although the volume hasn’t changed, the profit is dwindling lower and lower: It’s obvious the fault is with your pricing.
Problem factors
• Looking at competitors: You may not be charging enough for a number of reasons, one being that you are setting your prices off one of your low-priced competitors, thinking that you need to match or beat their prices to get the work. Why you care or even bother to look at what others are charging doesn’t make any sense at all to me. It has nothing to do with your costs or the profit you need to make.
In all my years in my shops I never even looked at what others were retailing their work for. I never called competitors to price check them or to see if they were quoting prices over the phone. Why? Because I didn’t care what they charged and because I didn’t want their prices to possibly influence what I was going to charge. My prices were based solely on my cost and the markup I decided I needed to make my profit – and that had nothing whatever to do with anybody else’s pricing.
• Faulty service writing: Another reason might be that you now have someone writing service who is not charging the appropriate number of hours for the labor operations being performed. The service writer is either not looking up the hours properly or at all, or does look them up but is then afraid to ask the customer for that many hours of labor. It may also be that the service writer is plugging him or herself into the equation and thinking, “Wow, that’s an awful lot to charge. I wouldn’t put that much into fixing a car like that.” Then they lower the price to some amount they would feel comfortable paying without ever presenting the real price to the customer or being asked to lower it.
• Lack of price awareness: The most common reason though for not raising prices is failing to recognize that the prices for everything we buy have increased but we haven’t raised ours when we get increases forced on us. Fuel is the perfect example. The cost of gasoline goes up. The parcel delivery companies raise their rates. Some call it a fuel surcharge. We pay more for shipping. Gasoline prices drop. Do the parcel companies lower their rates? No. So we still pay more for shipping. Meanwhile, most of us didn’t raise our prices when the cost of shipping increased so we lose money all the way around.
Human shortcomings
Why do we let things slide for as long as we do? It’s a combination of fear, ignorance and laziness. We all have some amount of fear of raising prices. We think if we do that we will lose all of our customers. That I’ve proven over and over again to be untrue. As difficult as it is for people to find technicians they trust, when they do find a good one they aren’t about to leave him or her for a small price increase. Sure, they might leave for a very large increase levied upon them all at once, which is why more frequent small increases are always a better way to go. Often they won’t even notice small increases or won’t feel they’re even worth mentioning. The key is to keep up with your cost analysis so you can make those small increases pretty much immediately and not have to play catch up by raising prices large amounts once you finally realize that you have to.
• Ignorance comes from not being aware of what’s going on with the economy. For example, we have a huge surplus of oil and gasoline right now. According to what we were taught in school about supply and demand, why then would gasoline prices be shooting up again? Who knows other than the executives at the major oil companies who set the prices, but it doesn’t really matter to us. The fact that they are going up means that everyone who supplies us with anything has already or will shortly raise prices to us, not just the shipping companies. The moment we see an increase in the cost of parts, fluids or anything else we buy, we should be ready to raise our prices, not six months or a year later after we have lost a whole lot of profit dollars, but right away. Have you recently given your employees a raise in their flat rate hourly pay or weekly salary, or has their health insurance gone up? Did you raise your labor rate when that happened? Here’s one to think about. If you are the owner of the business and you raise an employee’s salary without increasing your prices at the same time, you gave yourself a decrease in pay. Doesn’t seem fair does it, that you raise your employee’s standard of living while at the same time lowering yours?
• Laziness could be the biggest culprit, not the kind of laziness where you just don’t want to work at all, but the kind where you waste your time doing jobs someone else could do, but you do them because you like to and you neglect the jobs that can really make you money like keeping on top of the financial end of the business. With most shop owners having been wrench turners in their previous lives, they tend not to want to be involved with the paperwork of the business even though that’s where the money is, so they focus on the cars instead of the money. Somebody would be doing them a big favor if they took their tool boxes away from them.
While it’s good to have longtime suppliers that we trust, they also create a problem if we put so much faith in them that we assume the prices haven’t changed and that we are being correctly billed. Get into the habit of reading every invoice. It doesn’t take long but it can uncover mistakes and price increases of which you would otherwise not be aware. If you see something, say something. Let suppliers know you are watching and that you care if there are changes that you weren’t made aware of. That doesn’t mean that you want to beat suppliers up for price; you just want to get a fair price and know when there’s an increase so you can pass it along.
What about the price of highly skilled work as opposed to basic repairs and maintenance? Should there be more of a charge for things like component rebuilding and electrical and electronic troubleshooting? I’ve always felt there should be. When people have to take more time and acquire more skills to perform tasks, their efforts should be more highly rewarded. If they get paid more for what they do then the shop should as well.
What is knowledge worth? After tracking down the cause of a problem often the cure takes only a few minutes and may not require much in parts; so what do you feel you should charge? There are different schools of thought on this one. Some shop owners feel that if you charge for your work by the hour you should only charge based on the number of hours it takes. Others would argue that hundreds of hours went into learning how to track down and fix complicated problems and the shop should be compensated for the cost of training techs to be able to do it. Some shop owners are abandoning the hourly rate concept when it comes to troubleshooting and charging an agreed upon amount for fixing the problem that has nothing to do with time spent.
Often shop owners take the attitude that they will charge whatever their particular market will bear. They will experiment with prices to find out how high they can go before a good number of their customers say “no.” That may not be a very scientific way to figure it out but it works to determine a baseline, but then they would still need to keep up with changes in their cost of goods and services sold to them to stay current with their pricing.
Can you charge too much? Can you price yourself out of your market? You can on the wholesale side. If you have competitors who are after the same accounts you are and can’t show those accounts why your prices justify them paying you more you might very well lose them. On retail however you are dealing one to one, charging for each customer’s specific needs, so there isn’t nearly as much comparison shopping.
The best way I’ve found to keep your pricing right is to stay on top of changes in your costs, set your labor rate and parts markups accordingly and whatever the price comes out to on a specific job, ask the customer to pay it. You will find that if you are treating them right, most will. Some will try to negotiate a lower price and a few might say “no” but that same thing will happen even when you don’t raise prices. It’s just the nature of customers.
Is there a time to lower your prices? There might be if your cost of doing business drops but that would be rare if ever. You might run a special on some minor services to bring new customers through the door but you have to be careful if you advertise the price of such services that it isn’t so low that people can’t believe you would actually do it for that price. Then they will think you are trying to lure them in to buy something at a higher price which would totally defeat your purpose.
I once got involved with a group of shop owners who were advertising in a major New York newspaper. They used a rebuilt Powerglide transmission for $179 as an example in the ad. The only job I ever got from that ad was on a Powerglide that I had to do for $179. Needless to say I immediately dropped out of that group and never tried that kind of advertising again.
The bottom line is to treat your customers so well that they wouldn’t want to go anywhere else and price based on what you really need to get.
