Opening up an auto repair shop and making money at an auto repair shop do not automatically go hand in hand, period. Sure, you may love the work and you may eat, sleep, and dream cars, but at the end of the day you have bills to pay. As any aspiring shop owner will quickly learn, cashflow is the lifeblood of your business. Your ability to attract customers, recruit a team of mechanics, invest in equipment and upgrade the shop all depend on a healthy profit margin. In fact, one of the largest drivers of business failure is undercharging.
So, how do you calculate the labor rate or “door rate” as some shops call it at your shop? This might be a daunting task at first but there is actually an easy to follow formula that we will outline below.
You could take a quick survey of what other shops in the area are charging (and you should), but simply copying someone else’s pricing does not guarantee success at your shop. That is because you can’t guarantee that their formula is a winning formula for their shop, let alone for yours. There are just too many variables.
The price that a company can charge for its service or merchandise is subject to many influences:
1. Desired clientele & location
3. Fair trade laws
4. Operating efficiency
Be aware—if the price of your service is higher than that of your competitor’s, without reflecting any added value, such as superior location, experience, certifications, customer service, warranty, parts quality, etc., plan on a difficult time enduring. Added value is the key to demanding and receiving, a higher price point. You may even consider raising your labor rate for certain brands if you specialize in them, or if they are particularly difficult to service.
You’ll need to figure out what your policy is on price matching, as some customers may come to you suggesting you provide a discount, based on what “XYZ” company down the street is charging, or asking you to match online promotions, advertised by one of your competitors.
So now we arrive at the formula for setting your shop rate. At first glance it may seem complicated but is really simple. Each letter represents an area of costs that you need to consider as it impacts your hourly rate.
Monthly costs of operation Formula:
R + E +EL+ S + L + M + I + A+ TX + EQ / TMO = Base Hourly Rate
Here are what each letter represents and a ballpark figure to get you started. You need to change the amount to reflect your actual costs, such as your rent and salaries of your employees if you have them. Keep in mind that this is the labor rate per hour. If you have multiple revenue generating employee’s such as your mechanics, only use the salary of one mechanic, not all mechanics total. However, all of your non-revenue generating employees such as office staff, bookkeeper or your salary should be added to the “employees” calculator. This is because you could have three mechanics working at the same time, thus generating this hourly rate times three.
(R) Rent: $2000
(E) Employees: $4000
(EL) Electricity: $750
(S) Shop Supplies: $1000
(L) Leased equipment: $2000
(M) Marketing: $1000
(I) Insurance: $800
(A) Accountant: $900
(TX) Taxes: $2500
(EQ) Equipment/Tools: $750
(TMO)= 160 workable hours per month
Total overhead: $15,700.00 divided by 160 available hours = $98.125
But this is only going to cover your costs. This does not include profit or “margin”. To add in your profit, you need to take your total overhead and multiply if by 12 months (ex $188,400). Now multiply $188,400 by your desired gross profit percentage (say 40%) and then divide that number by 12 to get your monthly profit markup (in this case $6,280). Now add 6,280 to your $15,700 monthly overhead to get your total monthly cost of $21,980. Now divide one more time by 160 to get your hourly rate of $137.38 If this puts your hourly rate way out of line with competition in the area, then you need to look at ways to reduce your overhead, such as cheaper rent or less overhead employees. Perhaps you can get away with a part time bookkeeper instead of full time and things like that.
Tip: To calculate a base GROSS margin on labor let’s assume our total annual overhead is inline with the above figures. 15,700/ mo x 12 = 188,400 annually. If you want to gross 15%- you need to add 28,260 to that number (188,400 x 15%, divided by 12. Add that additional percentage to your base overhead figure to get = 18,055. Divided again by the total hours per month (160) = $112.84 per hour.
If you can accurately