Auto Service World
News   February 9, 2023   by Adam Malik

Why you shouldn’t cut your labour rate for this reason

The shop next door dropped its labour rate. Should you do the same? Here's why that's a bad idea...

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If the shop next door decides to take $10 an hour off their labour rate, should you follow suit? No, says a shop coach

Some customers will choose the shop they take their vehicle to based on price. There could be many reasons for this, ranging from poor marketing by the shop to the customer just wanting to pay as little as possible. But that doesn’t mean you should cut your labour rate in an effort to attract them.

You have to remember that not every shop owner is as informed as you are, said Bryan Stasch, vice president of product and content development at the Automotive Training Institute.

“And you got to remember the fact that no matter what industry, what business, there’s always somebody in your market willing to go out of business faster than you,” he said at NAPA Expo 2022.

Many shop owners have had to deal with a competitor who thinks they can make up a lower labour rate with increased volume of customers. But it’s a wrong way to think.

“Guess what? That only works selling canned goods. That does not work when you have time and materials, that you need to hold margin every single time you need to sell a product,” he told shop owners during his session, Finding Money by Understanding your Financial Numbers.

Your rate should reflect the actual costs of your business. So shops need to figure out their actual costs per hour, get their effective labour rate and calculate what they should be charging at the door, Stasch said.

He also noted that shops need to look at the average cost of parts sold to ensure the proper amount of margin is being collected.

“Is your markup multiplier at your sweet spot of average cost of parts sold,” Stasch asked.

This should be part of a parts pricing matrix, explained Cecil Bullard, chief executive officer of the Institute for Automotive Business Excellence and RLO Training.

“For those of you that may or may not know what a parts matrix is, a parts matrix is just a scheme for marking up your parts,” he said during his session, What are the Most Important Numbers for Financial Success? also at NAPA Expo 2022.

What that means is, you have a guide that shows if you buy a part at $1, you’ll sell it at, for example, $4; a $50 part for $125.

“it’s just a different markup on top of whatever I pay for that part, depending on the price of the part,” Bullard explained.

You do that because unilaterally deciding to charge the customer double what you paid eventually becomes unrealistic. If a part costs thousands of dollars, you’ll never get the sale if you double that cost on the customer’s bill.

“Adjust those multipliers,” Stasch said.

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