Setting Your Labor Rate
The Cost of Doing Business
Although this article is about setting your labor rate correctly, let’s first start with why you should….
If you originally set your labor rate based on what others in your area had theirs set at, raise your hand! You are just like 95% of the businesses in the independent automotive industry. You don’t want to be higher or lower for fear that customers won’t come to you or you won’t make enough money to keep your doors open. Congratulations, you are human and truly believe that your labor rate drives either one of these scenarios. So, let me pose this question, do you believe that most people buy/purchase based on the lowest dollar amount charged? Short answer……NO!
Let me explain, as a general rule (write this down and believe it) “People Buy People, NOT Price”! In the service industry customers or clients want to feel secure in the purchases and that isn’t really ever about price. Now, that does NOT mean we can price ourselves super high simply because we believe this statement, it does NOT. What it means is that although price is relevant to most, it is NOT the most important thing to all. There will always be those customers that are looking for the cheapest and believe me when I say, they are not your clients! We want clients that believe in quality, trust, convenience and security as opposed to simply price! Price only clients generally will always beat you up/down for every last dollar and that is never going to be a good client. So please understand, we deserve to be paid for what we know, and what we do! We deserve the clients that are more concerned with workmanship, parts quality, convenience, and the guarantee/warranty we provide, not just price…..
We have gotten off track here, so let’s get back to setting labor rates. Setting your labor rate should be derived from mathematical calculations only based on the “Costs of Doing Business” (CODB). Why not just use the guy down the street assuming he did it right? His CODB may be substantially lower if his building is paid for, if he doesn’t have a loan on the business, any number of reasons AND assuming he did his correctly is never going to end well!! So what does CODB mean? It simply means that we look at our P&L’s or Business Checkbook and add together “ALL” the expenses paid by the company monthly (base overhead) add Technician wages and subtract parts profits to determine total Overhead. Then we divide that number by the total number of billable hours available for the month. Then multiply that by your current productivity and just like that, you get your “Need Hourly Labor Rate”. I know, it is a lot of calculating and some may be confusing so let me break it down into easier steps.
- All Expenses (AE) or Base Overhead—everything you pay from the business, loans (principle & interest), electricity, water, sewer, your pay, desired profit and again, in short EVERYTHING paid by the business, for the last 12 months!
- Technician Wages (TW)—this is the GROSS wages paid to the Technicians only (unweighted), for the last 12 months! All benefits paid should be in the Expense category!
- Parts Profit (PP)—simply take the income and deduct the money spent to get this number, for the last 12 months!
- Billable Hours (BH)—this one takes a little more effort but is still simple multiplication! Take the number of Techs you have, multiply that by the number of hours worked (by the Techs) daily and multiply that by the number of workable (does NOT include weekends or Holidays) days in the month! An example with: 2 Techs X 8 Hours worked a day =16 Hrs. Multiplied by 21 days worked = 336 available hours a month multiplied by 12 months = 4032 Hrs. yearly!
So, the final math is: AE + TW – PP = Total Need (TN)!
TN divided by BH = Need Hourly (Labor) Rate
If you understand Microsoft Excel, this is easily done in a spreadsheet so that you can look at it quarterly and start to adjust accordingly. This is the math, and there is no denying that this will give you a base for your labor rate. If you want more than the math states you need, go for it, I encourage it, but make sure you are at least getting what the math says you need!
Once you have the “base” hourly rate set to the cost of doing business and have watched it to better understand it, there should be a raise in labor rate yearly. That amount varies according to every individual owner, but your rate should never go down! Remember why you got into business, regardless of what your reasons are, the most basic should be to make money and this is how you start. There are many other things that are required here and we will address those at later dates, but you have to start with the correct labor rate and then go from there! Failure to perform this basic fundamental will eventually lead to the business collapse unless you are independently wealthy and aren’t in the business to make money!
If you need help with your business and want to see and feel the successes you expected when you opened your doors, give us a call at:
The ACT Group, 916-588-0775 or visit our website for more information www.automotivecoachingandtraining.com