Too many shop owners still use one “catch all” labour rate for their business and if they do not change the way they charge their customer/client for services rendered, it could contribute to the demise of their business operations.
The new dimension of the labour component that must be understood today is the “tier” labour rate system, or a rate that is referred to as the “diagnostic” labour rate.
The tier labour rate denotes the level of diagnostic skill that is under the roof of the shop. This rate is invoked when diagnostic services are required for the automobile. There is no “flat rate” manual to follow, and it is solely based on the skill level of the technician involved.
Many shops fail to understand that today’s services, and their future services, will be based on their knowledge and skill to diagnose the technology under the hood that has failed their particular customer/client. When technology fails, a systemized, time consuming strategy is required to diagnose and fix the problem.
This issue involves special expertise by a highly skilled, specially trained technician, coupled with the use of high end, very expensive equipment.
One other element to diagnosis, that is often over looked, is the fact that management, or the service writer, is required to spend more time with the customer/client explaining the procedures and progress of the diagnosis element. This time can be substantial to ensure customer/client confidence and shop credibility is maintained when compared to the amount of time to explain a mechanical/maintenance service. This element must be accounted for in the financial equation.
When examining the door rate of diagnostic work, the mathematical formula must take into account the above mentioned issues plus the cost of numerous pieces of specialized diagnostic equipment as well as the cost of on-going software upgrades to said equipment and continuous, numerous diagnostic training courses. In diagnostic work the saying “time is money” never stood out stronger.
The financial equation for the year 2000 to set the retail door rate for mechanical/maintenance work in Ontario (it’s similar for Canada as a whole) is 3.75 times the hourly wage of the top mechanical/maintenance technician. For example, if the top mechanical/ maintenance technician is earning $19.50 per hour, then the minimum retail door rate charged to the customer/client should be $73.00 per hour ($19.50 X 3.75).
In the case of diagnostic work, the multiple is different. To cover the issues previously mentioned, the hourly diagnostic wage of the technician is multiplied by 4. For example, the diagnostic tier rate of a diagnostic technician being paid $23.75 per hour is $23.75 X 4 = $95.00 per diagnostic hour.
The shop now charges two labour rates, namely, $73.00 for mechanical/maintenance and $95 for its diagnostic rate (tier rate).
It is recommended that the shop charge a minimum of one hour of diagnostic time per job.
In other words, $95 for the customer/client to come to the table. I have been reassured by many competent technicians in the industry that competent diagnostic technicians can diagnose 60% to 70% of diagnostic problems within the first 45 minutes. The other 30% to 40% of the problems are what we call “safari hunts” in which the technician may take 3 to 6 hours to figure out the problem because they haven’t been there before. It doesn’t mean the technician is incompetent, unless it is reversed and 60% to 70% of the jobs are safari hunts, it simply means they are learning about the new technology that they have now been introduced to. The next time they see this same problem they will immediately recall the familiar territory they are finding themselves in and the learning curve, and the time curve, is substantially reduced. The minimum one hour charge, and that extra 15 minutes not used in 60% to 70% of the jobs diagnosed, helps contributes to the cost of these “in-house training” hunts that one inevitably finds themselves in.
To secure confidence in the customer/client, the better shops also reassure the client that the maximum charge for any diagnostic work will be 2.5 hours or $250.00 plus parts (based on $100 per hour). Consider developing a ceiling of diagnostic time for your shop, as this allows the client to realize that there is an end to any problem and it is not an open pocketbook. It says to the client, “we are competent, we know what we are doing, we can, and will resolve your problem”.
Diagnostic time is a new “habit” that the shop must learn to charge for. To start this new habit, consider an objective to bill 1 diagnostic hour per day at the new tier rate. The difference between the one “catch all” labour rate of, say $65 today and the new tier rate of $95 is $30. If this new habit is instilled in the shop, that would create a minimum of an additional $600 gross profit/net profit per month (30 time 20 operating days), or $7,200 in additional gross profit/net profit per year.
If you can average 1 additional diagnostic hour per day being charged out at the tier rate, at $95 per hour, this would produce an additional gross profit of $1,900.00 per month based on 20 working days per month, and $22,800.00 per year.
Once this habit has been developed, and the shop is “psychologically” comfortable with its new found professional methods, the ultimate objective would be to have 20% to 30% of daily shop time billed, going out at a tier rate.
This percentage would obviously be based on the mix of customer/clients being served (newer vehicles vs. older vehicles), representing the amount of time spent working on higher-end new technology.
To get to this level of business mind-set and percentage of total time being billed out, could realistically take the shop two years.
However, it is imperative to start developing new skill habits now. Consider taking the time to discuss and allocate marketing dollars to educating your customer/client base on diagnostic skills and equipment required to professionally service today’s automobiles.
If you, as a shop owner or manager, do not recognize the necessity, and have the know-how, to charge for the skill level and technological expertise that is required to maintain today’s vehicles, please enroll yourself in, and receive, some competent business management training.
Diagnostic time is here today, it is real, it is here to stay, and it is the most important element to understand to cover on-going costs, upgrades, and contribute to the shop’s current and future bottom line.