Have you ever wondered how doctors, lawyers, and accountants arrive at the amounts they charge you for their services? If you were to ask, they would likely tell you that their charges are a reflection of their professional knowledge and skill that took many years to acquire, which on the face of it, seems fair enough. However, have you also ever wondered if your customers ask themselves the same question, which it must be said, is a very good question, indeed?
So how do you arrive at the amounts you charge your customers to repair their vehicles? For instance, do you levy “catch-all” hourly-based rates? On the other hand, do you calculate “layered” charges that reflect not only the different skills, competencies, and fields of expertise of your technicians, but also the costs you incur in attracting and retaining top-notch technical staff?
While charging simple hourly-based rates is not all bad, we would like to suggest that there are better ways of calculating labour charges. Thus, in this article, we will take a closer look at why a multi-door approach to calculating labour charges could mean the difference between becoming or remaining profitable, and merely surviving in a very tough industry. Let us start with saying that-
While our customers could be forgiven for not knowing how we know how much to charge them in terms of labour costs, it is incumbent upon us as owners and managers of independent workshops to know. Moreover, since remaining profitable today is difficult enough as it is, we also need to understand that how we approach our pricing models does not only affect our profitability, it also determines whether our customers view our labour charges as expensive or reasonable, given the level of service they receive.
Therefore, since price is often the deciding factor for many customers when it comes to deciding which workshop to use, it makes good sense to develop pricing models that reflect the skills of your technicians, and gives you a reasonable return on your investments in tools, equipment, and the ongoing training of your staff.
If you are a veteran workshop owner/manager, you probably know all of this. However, if you have just started a repair business, or are new to managing a repair business, it is somewhat natural to adopt the simple one-door pricing model, also known as the R-R-R approach, simply because it is the easiest to implement and to explain to customers. Nevertheless though, the single-door approach is not always the most effective, so let us look at-
R-R-R stands for Remove, Replace, and Repair, or the “one-door price”, and it applies to most routine brake, suspension, and other uncomplicated mechanical repairs. As we know, this type of work is almost always the least complicated and uses the least amount of resources, so if you calculate a one-size-fits-all hourly rate based on your floor surface, or perhaps on the maximum number of billable hours you have in any given fixed time period, you will usually, but not always, come out ahead.
However, some types of R-R-R work such as engine and transmission rebuilds require skills that not all technicians possess, and as we also know, attracting and retaining technicians with the requisite skills can be challenging. As a practical matter though, our customers are not interested in knowing our issues with finding highly skilled technicians; all our customers are interested in is having their engines and transmissions rebuilt to factory standards, and herein lies somewhat of a problem when it comes to charging a fair labour rate for work that requires above average skills.
In this writer’s experience, one aspect of the problem, and especially if a regular customer queries a higher labour charge for his engine rebuild than he usually pays for a brake pad replacement, is that most customers think that all mechanics and technicians can do everything, which is simply not the case. Another aspect of the problem is that if you are not a specialist repairer that only does engine and/or transmission rebuilds, these types of jobs don’t roll through the door every day. Thus, from the perspective of at least some clients, it might appear as if they are being ripped off by a higher than normal labour charge just because they brought you a high value job.
Imagine this scenario: you have a highly skilled technician that spends the best part of a working day assembling an engine. You have the knowledge that his work is of an exceedingly high standard, and you also know that as a result of him paying attention to even the smallest details, you will never have a comeback on this particular job, which, it must be said, is worth many dollars in itself.
Given the above, common sense would dictate that this job should not be billed at the same hourly rate you would normally charge for say, simple brake pad or headlight bulb replacements. So, how should the labour charge for such high value jobs be calculated? Note that while it is not for this writer to tell you how you should run your business, he would nevertheless like to suggest the following method, which has served him well over the years-
If your calculated hourly rate is applied equally to all billable hours, you should ideally be able to cover all your immediate overheads such as your wage bill, rent, bank charges, phone and utility bills, etc., etc, which we all understand, but there is major problem with this approach. The problem is that it does not take into account the fact that some jobs require specialised skills, nor does it take into account the cost of staff training, renting specialised tools and equipment, and the fact that you necessarily have to pay some technicians more (than others) to acknowledge the real value they bring to your business.
Therefore, we would suggest you view your hourly-based labour charge as a sort of minimum charge, to which you can add percentages that reflect the true cost of doing some types of jobs. For instance, if we use the engine rebuild as an example, you may want to add a percentage that reflects the skills of the technician, and another percentage to cover incidental costs such as consumables and cleaning materials. You may also want to add another percentage to cover the true costs of clearing fault codes, and/or performing reprogramming / integrations/ resetting of control modules upon installation and commissioning of the engine.
You may already have a dedicated charge for things like consumables and cleaning materials, but is your normal hourly labour charge truly reflective of the skills that are required to reprogram, reset, or integrate control modules during commissioning of an engine? While it is true that some of these steps are sometimes not required, the fact is that they often are required, which means that your highly skilled technician may have to spend time performing advanced diagnostics /reprogramming functions at the hourly price of a brake pad replacement.
Exactly how much you add to your basic hourly rate is entirely up to you, but this writer recommends that you do these calculations before work starts to avoid an unpleasant discussion with the customer later on. Moreover, the advantages of having different prices for different types of R-R-R work beforehand is that you can disclose everything that goes into the final bill to the customer upfront on the one hand, and that you charge every aspect of complicated jobs at the true cost of some of these aspects, on the other.
If you employ service writers or advisors, you may want to prepare a sort of chart or script for them that lists everything (that goes into some types of complex jobs) and their associated costs. Doing this will remove all of the guesswork that often goes with quoting on some jobs, which in this writers’ experience, goes a long way towards selling expensive procedures to customers that may be on a budget, simply because they get an all-inclusive price right up front.
Of course, it goes without saying that if your service advisors are not mechanics themselves, you may have to invest some time in training them to the point where they recognise that not everything can be done at the same hourly rate. In addition, you may have to train your service advisors to enable them to explain to customers why some procedures are inherently more expensive than others are. The upside of these training exercises is that your front office staff becomes more aware of just what goes into major high value jobs, your customers know exactly what they are paying for, and the real value of your repair orders increase significantly.
We are however not suggesting that you should tell every customer what it costs to keep your diagnostic computers updated, how much you spend every year on training your technicians, or what your rent comes to per square metre of floor space. What we are suggesting is that you as the owner or manager of a workshop should know what it really costs to do complex jobs, and that you should be prepared to go the proverbial extra mile in terms of customer service to justify differential hourly labour charges on complex jobs.
Having said all of the above, we would also like to suggest that you consider two other pricing models for work that does not involve mechanical repairs or routine servicing and maintenance procedures, these models being-
Most workshops probably already have a basic charge for diagnostics, and most customers probably accept or believe that “diagnostics” involves nothing more complex than connecting a scan tool to their vehicles, on the mistaken assumption that a computer will pinpoint the actual problem, which as we know, is almost never the case.
While customers could be forgiven for not understanding just how complex modern automotive electronics has become, it is incumbent upon us as workshop owners and managers to explain to our customers that a), electronic diagnostics is a process, and b), that diagnostic processes require the acquisition, interpretation, and analysis of information by highly skilled technicians that use expensive equipment.
More to the point though, is your diagnostic rate a true reflection of the actual cost of not only acquiring and maintaining your scan tools and their software, but also of additional costs like ongoing training of your diagnostician(s), or subscriptions to online resources to obtain technical information that cannot be had from vehicle manufacturers? We would like to suggest that many workshops charge diagnostic rates that are too closely linked to their hourly R-R-R labour rates to allow a reasonable return on the investments in time, equipment, and training that are required to perform complex electronics diagnostics.
The above is saying a lot, and we are not suggesting that you should suddenly start ripping off your customers, especially since a fair charge for diagnostic should ideally not include repair time. A diagnostic charge should be just that, a charge to diagnose faults, not to repair faults found, but what constitutes a fair diagnostic charge?
This will vary from workshop to workshop, but at a minimum, the time your technicians spend purely on diagnostics should not have to be subsidised by other forms of work. In translation, this means that your diagnostic charge should be sufficient to allow you to maintain your arsenal of diagnostic equipment without for instance, having to rely on your basic R-R-R hourly charge to pay (even partially) for diagnostic software updates or your monthly rental payments if you rent your scan tools.
However, arriving at a diagnostic charge that is fair to both you and you customers is not easy, but one way of doing it could be to do an audit of say, two years’ worth of past work orders to determine the average amount of hours your technicians spend on diagnostics in a month’s worth of billable hours. Once you have this value, you can compare it to the actual annual cost of buying/renting and updating of your equipment, to which value you should add the cost of training of your staff.
The comparison should yield a rough approximation of what it costs you to perform diagnostics on an hourly basis but chances are that you will find that your diagnostic rate is not sufficient to pay for the next training course, or to perform extensive software updates on your scan tools. In fact, this was the case in this writer’s own workshop, and fixing the problem involved hiring an accountant to mine historical work order data to calculate a diagnostic rate that provided an appropriate return on his investments in time, training, and equipment- without scaring off customers at the same time.
We are not suggesting that every workshop owner or manager should now rush off to hire accountants, as the cost could be prohibitive. Nonetheless, what we are suggesting is that now would probably be good time to review your diagnostic rate to be sure that you are a), not short-changing yourself, and b), that you maintain your establishment’s credibility and excellent reputation by charging enough for diagnostics to attract, and retain the best available diagnostic technicians. In this writer’s experience, this is the only way to ensure that electronic diagnostic procedures are performed right the first time, which brings us to-
While we understand the distinctions and differences between the types of jobs we do, customers do not always realise that the different skill levels within our workshops represent a “loop” of skills that enables us to provide them with a one-stop service that meets all of their diagnostic, repair and/or maintenance needs. At least, that is the theory.
Whether this is true in practice in all or most workshops is largely unimportant. What is important however, is that customers almost certainly do not know, or appreciate the fact that reprogramming and/or resetting computers, keys, and control modules is often a time consuming process that can only be performed by highly skilled technicians using advanced equipment and OEM software that is sometimes exceedingly difficult to obtain.
Thus, this being the case, do you always a charge an appropriate rate for this kind of service, or do you charge a rate that is similar to, if not identical to your diagnostic rate? The business principle behind this question is this; your customer is not paying you fix his ECU’s corrupted programming now- instead, he is paying you for the knowledge, skills, and (the use of the) equipment that is available to fix his problem at this point.
Of course, this is not the same as saying that you should bleed your customer dry just because you have the skills, knowledge, and equipment to fix his corrupted ECU. What we are saying is that the amount you charge him should ideally defray at least a significant percentage of the cost of the software you are using to reprogram his ECU. We cannot tell you what this percentage should be, but what we can tell you is that if you are charging the customer your diagnostic rate, you are almost certainly not charging him enough to cover the costs you have incurred in obtaining the correct software in the first place.
Of course, you cannot expect to recover all of your costs from one single customer, but calculating an appropriate labour rate becomes easier when you take into account the facts that a), ECU’s don’t become corrupted very often, and b), that when they do, reprogramming them right the first time is a skill that not all technicians possess. Therefore, and in addition, we recommend that your reprogramming rate should take into account that programming software often represents “dead” money, in the sense that it can take you a very long time to recover the often very steep purchase price of advanced software.
From a purely business perspective, our goal should be to recover such “dead” money as soon as possible, which means that ideally, we should charge reprogramming and/or resetting work at rates that are significantly higher than any other rates we charge for other types of work. Exactly how much higher will differ from one location to another, but it has been this writer’s experience that steadily increasing your rates for this kind of work over a period of time will soon reveal what your local market will bear, which leaves us with this-
In today’s highly competitive environment we could all probably benefit from at least a short business course, but failing that, we could all also benefit from reviewing our different labour charges on a regular basis. We could also use the business principles behind regularly reviewing labour charges as a guiding principle when we explain our labour charges to customers. The problem is that while we often think we communicate effectively with customers, we often fail to utter the words customers most want to hear, these words being “We will never let you down, but in order for us to do that, we need (insert amount of dollars here) from you.”
The strategy of explaining to customers how labour charges are calculated has served this writer well, and there is no reason why it won’t work for you, too.