We’re all familiar with the old adage, “You can please all of the people some of the time or some of the people all of the time, but you can’t please all of the people all of the time.” When it comes to setting your pricing, nothing has ever rung more true.
Overcharge, and you risk running off all of your customers. Undercharge and you’ll soon find yourself out of business. So how do you determine what to charge your customers? There are four things to keep in mind as you establish you pricing structure.
Who Are You?
First and foremost, you have to determine what kind of shop you are or want to be. As you figure this out though, remember this:
You can be fast, good or cheap. You can be good and fast, good and cheap or fast and cheap, but you can’t be all three. If you try, you’ll probably fail. That’s because no matter how much you want to be all things to all people, it’s impossible to keep your pricing structure intact when you’re one kind of shop to some customers, and a completely different type of shop to other customers.
In order to succeed, you have to decide who you are and stick to your guns, even if that means losing some customers.
For my shops, I choose to be fast and good. Because we’re a one-stop shop, doing all types of repairs, my main objective is to do the job right, and do it fast. This decision helped me determine my pricing structure. Because I have to have high-quality technicians, my labor costs run a bit higher than other shops whose techs might not be as experienced.
Regardless of what your labor and parts costs are though, there is a rule of thumb all shop-owners should use when deciding how much to charge.
The Rule of Three
It’s very simple: Whatever your labor costs are, multiply it by three. For example, if your labor costs $40 per hour (which includes the cost for general technicians and general service personnel combined), your charge to the customer should be $120. This might sound high, but remember, your labor costs aren’t just paying for your skilled technicians. That fee also covers the daily shop maintenance, insurance costs and the money to simply keep the lights on.
Not all shops will have such high labor costs. If your shop does mostly light repair and maintenance, or electrical work, your labor costs may be lower, thus your pricing structure will be lower.
Remember, when we work on a customer’s vehicle, we all use the same manual that dictates how long a job should take. If the manual tells us the job will take four hours, we’re charging that customer for four hours work, even if the job takes two hours or eight hours. That three-times markup formula helps make up for those times when your techs take longer than expected and potentially are losing money.
Determining your parts pricing is just as simple: Your markup should be two and a half times the cost of your parts. Of course, parts pricing is way more complicated than labor costs. A skilled tech has a pre-determined market value. But when it comes to parts, a part that might cost you $200 from one source, might be only $150 somewhere else.
You deal with a variety of suppliers when determining prices for parts. There are dealerships, aftermarkets, wholesalers, etc. In order to get the best price for the parts you need, you should be constantly searching the Internet, calling aftermarket suppliers and talking with dealerships regularly. For some parts, however, marking something up by two-and-a half times its cost just isn’t realistic. Sure, you can mark up that $10 part to $30, but a part that runs $100 or more, you might get only an 80 percent markup.
Ultimately, you’re looking for an overall markup of two and a half times your parts costs as a whole. This means monitoring your cost and profit sheets daily to ensure you’re within that range.
Location, Image, Competition
As I mentioned before, the kind of shop you are will determine what kind of pricing you’ll provide. A big part of equation involves figuring out your market. A high-end shop won’t do well in a low-income area.
The outside appearance of your shop also can determine your pricing structure. If your shop looks run-down and shabby, customers will be expecting fast and cheap, not expensive but good.
For instance, when you go to McDonald’s, you expect to pay a couple of bucks for a burger. But if you go to a high-end restaurant, you understand that your burger will cost upwards of $10. You also know the burger at the high-end restaurant will be larger, made of higher-quality beef and will include proper silverware, a cloth napkin and a higher level of service. Customers are willing to pay more if they believe they are getting better value.
The point is, you can’t flip-flop. Decide who you are and don’t change your pricing structure on a customer-by-customer basis. You’ll just confuse people, which is never good.
The same goes for competition. If a shop down the street is lowering its prices, don’t react by lowering yours. Chances are, the other shop is ignoring the markup rule of thumb and will suffer financially in the long run, even if its customer numbers rise in the short term.
As it turns out, pricing isn’t really that big of a mystery. Figure out what kind of shop you are, use the right formula to determine your markups and stay true to your image. If you follow these simple steps, you’ll find that you don’t have to be all things to all people, and your shop will succeed.