Profit margins are shrinking at collision repair shops across the country. Margins have decreased on everything from parts to materials: Shops in some areas are seeing a mere 3 percent net profit on paint, and single digit net incomes overall.
Although some things are out of your control, one powerful way to offset business costs is not: your labor rate.
Larry Edwards, chairman of Edwards & Associates Consulting, says labor rates are commonly set too low because shops simply allow it to happen. “Too many shop owners want people to set their rates for them,” he says. “Some shop operators have lost sight that they are the ones who set and have full control over the rates, not insurance companies.”
Tim Ronak, senior services consultant for AkzoNobel, agrees. Too many shops feel that vendor partners dictate labor rates—a myth, he says. In reality, he says every independent shop not affiliated with a direct repair program (DRP) has free will and the ability to set their own “fair and reasonable” rate.
Ronak says what constitutes “fair and reasonable” is a blurry line, and there is really no firm method of evaluating that. Ultimately, it comes down to shop operators assessing their organization and deciding what services are worth.
“Good shop owners set their own rates,” Edwards says. “They assess their costs of doing business, markets, and value provided to customers, and decide what a fair return for those investments should be.”Everyone knows they should analyze both their business costs and local labor rate surveys to get a feel for where their labor rate should be. But that’s not all that you should base your rate on. There are a few other considerations to “fairly and reasonably” set your bar a bit higher to achieve a 75 percent gross profit margin on labor, which Ronak says all shops should shoot for.
Develop a Retail Pricing Model:
Ronak says one of the biggest things that affects labor rates for shops is the industry’s abandonment of a retail pricing strategy. Businesses in other industries add costs into their pricing structure to pad them from other financial hits.
—Tim Ronak, senior services consultant, AkzoNobel
In line with that, Ronak says shops need to understand how much cost they incur by accepting credit cards from customers. That’s the most typical way that people pay for collision repair services, but it has a whole different cost-structure compared to cash-paying consumers. Ronak says shops give up 2 to 4 percent of all dollars collected to the credit card company in fees, which includes all parts, materials and labor dollars.“All the fees with credit cards—which can be more significant than you might expect—have to be covered by repair centers,” Ronak says. “You wind up giving consumers with credit cards a far better pricing structure than you give to your best insurer.”
Ronak suggests shops should set a retail labor rate for credit card-paying customers about 10 percent higher than customers with cash.
That helps offset and insulate your business from the costs associated with accepting credit.
For example, Ronak says shops might experience a $50 credit card transaction fee on a 10-hour $2,500 repair. You have to increase your labor rate by $5 an hour to offset the cost.
Analyze Your Market:It is important to know what other shops in your market are charging. Labor rate surveys can help you get a point of reference on where you sit relative to the competition, but be careful not to put too much stock in them. There are several market factors to consider that labor rate surveys don’t account for: • Shop accessibility: Is your facility placed along a highly traveled frontage road or thoroughfare, or is it on a hidden back road? • Zone location: Are you located in an industrial zone where costs are low, or are you in a commercial zone where you pay a premium price? • Market population: How much demand exists for your services? • Community growth: Due to urban sprawl, shops that were once located in rural areas may now be in more prosperous markets, which could cause increases in certain business costs.
Ronak says those factors vary from shop to shop, and are important factors to consider when raising your labor rate.
He suggests you re-evaluate your rate monthly, as market factors and conditions that affect your business can change over time.
Assess Your Value-Added Differentiators:
You can’t just set your labor rate in a way that best competes with your neighboring shops, although it is one factor to consider. That’s because every business has different overhead costs, which impacts the revenue they need to be profitable. In addition, you may offer additional amenities or services that make you more appealing and better that the competition. You should charge more for that.
Edwards says shops can take one of two roads when raising their labor rate: price or value. He suggests taking the value route.
“If you take the pathway of value and build it into the goods and services you offer, then price is not important,” Edwards says. “Customers will buy your goods and service based upon the value they get.”
But how do you know exactly how much labor rate increase your services are worth? It’s up to you to decide, and your customers to validate. Edwards says customers won’t be willing to pay for it if it’s something they don’t find value in. But more often than not, customers want to leave their vehicles with shops that pay attention to those details.