Too many shop owners use one “catchall” labor rate for their business, and if they do not change the way they charge their customers for services rendered, it can contribute to the demise of their business operations.
A new dimension that must be understood today is the tiered labor rate system, or a door rate system sometimes referred to as the flex labor rate.
The tiered labor rate denotes the talent that is under the roof of a competent 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 the future of their services will be based on their knowledge and skill to diagnose the technology under the hood that has failed inside the automobile serving their customer. When technology fails, a systemized strategy which consumes time is required to diagnose and fix the problem. This issue involves special expertise by a qualified technician, coupled with the know-how to use high-end, expensive equipment.
One other element to diagnosis is the fact that management, or the service writer, is required to spend more time with the client explaining the procedures and progress of the diagnosis element. This time is substantial when compared to the amount of time to explain a mechanical repair or maintenance service. This element must also 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, the cost of on-going software upgrades to said equipment, and continuous and numerous diagnostic training courses. In diagnostic work the saying “time is money” was never more truthful than it is today.
The financial equation in the year 2000 to set the retail door rate for mechanical/maintenance work in Ontario 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 retail door rate charged to the customer/client should be a minimum of $73.00 per hour ($73.12 to be exact).
In the case of diagnostic work, the technician is probably earning anywhere from $21.00 to $26.00 per hour and the multiple for this expertise is four times the hourly diagnostic wage of this technician. So in our example, the tiered rate should be from $84.00 ($21.00 x 4) to $104.00 ($26.00 x 4) per diagnostic hour.
The shop now charges two labor rates, namely, $73.00 for mechanical/maintenance and $95.00 ($23.75 per hour technician) for diagnostic work.
Counsel the client to expect a charge of a minimum of one hour of diagnostic time per job. I have been reassured by many competent technicians in the industry that competent diagnostic technicians can diagnose 60% to 70% of the problems within 45 minutes. The other 30% to 40% of the problems are what we’ll call “safari hunts,” in which the technician may take three to six hours to figure out the problem because they haven’t been there before.
Unless 60% to 70% of the jobs are safari hunts, it doesn’t mean they are incompetent–it simply means they are learning a new technology that they have just 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 is substantially shortened. The minimum one hour charge, and that extra 15 minutes not used in 60% to 70% of the jobs diagnosed, helps contribute to the cost of these hunts that the technician inevitably finds himself in from time to time.
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 (based on $100 per hour) plus parts. 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, and we know what we are doing.”
Charging for diagnostic time is a new habit that the shop must learn. To develop this new habit, the objective should be to average one additional hour per day being charged out at the tier rate. At $95 per hour, this would produce an additional gross profit of $1,900 per month based on 20 working days per month, and $22,800 per year. Once this habit has been developed, the ultimate objective would be to have 20% to 30% of shop time billed going out at a tier rate based on the mix of customers being served. To get to this level of business will realistically take the shop two to three years.
Consider taking the time to discuss diagnostic billings with your client base.
If the client does not recognize the skill level and technological expertise that is required to maintain today’s vehicles, he had better enroll in some competent business management training. Diagnostic time is real, it is here to stay, and it is an important element in covering costs and contributing to the installer’s bottom line.