Raise your labour rates, fire a few customers, and grow your bottom line

Everyone, who knows this industry, understands that things are changing very rapidly. Everyone also understands that there is an extreme shortage of competent technicians. The problem with this is that the issues in our industry are creating increased costs, and these costs must be dealt with.

Let’s assume the shop owner goes through the processes and has examined the operation very carefully and eliminated any waste to keep costs down. Management has also examined the level of productivity per person to ensure that this issue is addressed. Everything has been approached with thoroughness, but management comes to the only conclusion that increased costs are higher than expected and they must be passed on through an increase in the shop’s labour rates.

Now management’s mind starts to play games. Management doesn’t sleep too well at night. Management starts to think, “If I increase my labour rates, I will lose my customers and suffer financially”. The things we dwell on sometimes are amazing.

Consider this; if you are competent and your clients trust you, and you never let them down, why would they leave you over a labour rate increase?

Consider that it is time to slow down and do the math in your business. How many customers could you let go (or even fire) and send them over to the competition? There is a formula, use the following the example.

Shop Assumptions:

– Shop labour dollars sold last year was $350,292

– Shop labour rate is $60

– Shop is averaging 1.48 labour hours billed per workorder

– Shops gross profit earned from labour is 94.5% (labour dollar sales minus sublet labour equals labour dollar gross profit. Labour dollar gross profit divided by labour dollar sales equals labour gross profit percentage)

– Shop needs a 15% labour rate increase taking it up to $69 ($60 X 15%= $9)

1 – The first step is to take the labour dollars sold and divide it by the labour rate.

$350,292 divided by $60 = 5,838.2 hours billed for the year

2 – Take the hours billed for the year and divide it by twelve. This gives you the average billed hours per month.

5,838.2 divided by 12 = 486.51 average billed hours per month

3 – Calculate the following mathematical formula:

Gross Profit Margin percent on labour divided by gross profit margin percent on labour plus 15% minus 1 = the percentage reduction allowed in billed hours.

94.5% divided by 94.5% + 15% =

94.5% divided by 109.5% = .8630

.8630 – 1.0 = .1369%

(expressed as 13.69%)

4 – Average labour hours billed per month times percentage reduction allowed in billed hours equals actual number of reduced labour hours allowed

486.51 X 13.69% = 66.60 hours

5 – Average labour hours per month minus actual number of reduced labour hours allowed equals new average labour hours to be billed at new labour rate

486.51 – 66.60 = 419.91 average monthly hours PROOF: 486.51 X $60 = $28,890.60

419.51 X $69 = $28,946.19

(the rounding up of all numbers makes for a slight difference)

6 – In other words, we can bill out less hours at the new labour rate and still retain the same labour dollars in the shop as we had at the old rate.

Now the interesting part occurs. It is certainly not the intent to lose any clients, but there are some customers management would probably prefer if they went somewhere else (the real world here), therefore, how many customers could the business afford to lose (or fire) after management raises the labour rates, without affecting the total labour dollars brought into the shop?

Actual number of reduced labour hours allowed divided by average labour hours billed per work order equals number of customers that can be “fired”:

66.60 divided by 1.48 = 45 customers

It is most unlikely that the shop will lose 45 customers in a month over a $9 labour rate increase, however, if some are lost, or fired, that can be good too because it frees up valuable time. Time that can be spent with “clients”, not “customers”. Time that allows you to “slow down” and get focused on the client’s needs, which in turn, allows the shop to service them very well, and increase total revenue substantially beyond the old labour rate revenue. All costs are now covered, and revenue growth begins, coupled with bottom line growth. With satisfied clients, the shop most likely gets “client” referrals, not “customer” referrals.

Many shop owners fear a labour rate increases, and yet if they would do the math, it could mean the difference from going to a financially stable shop providing good salaries for all, versus trying to run a stressed out cash strapped shop. Shop owners (management), too many times, can be the real enemy to a successful enterprise, not the technicians, not the client, just the person in the mirror who writes the cheque.

Work out your numbers to ensure you are not the one holding your shop back from moving to the next level that it must get to if it is going to succeed over the next five years.