Many repair shops use matrix pricing for their parts, but that still leaves labor-only repairs – especially ones that take several hours – at a huge risk of being underpriced. This directly hurts your profitability.
What do you base your rates on? If you just consider your technicians’ wages, you’re missing other expenses that can add up quickly. Let’s talk about what you should be charging for your labor!
At CSI Accounting & Payroll, we’ve served automotive shops for nearly 60 years. While we work with most industries, we have an undeniable specialty in auto repair shops – in fact, that's where we started when we first opened our doors.
That means we’ve answered these questions more times than we can count:
As I said in the introduction, lots of repair shops underprice their labor by just basing it on staff wages, which can deeply cut into your profitability. This is especially true if you have a lot of jobs that take longer than two hours to complete or ones that don’t involve replacing parts.
While the main focus of this article is using matrix pricing (also called tiered labor pricing), I also want to encourage you to compare your rates to the local market.
You can – and should – price competitively, especially with dealerships if they charge the norm. (Yes, really! You are just as qualified. Don’t undervalue yourself because you’re scared of complaints or driving away customers. Here’s how to raise your fees.)
Aside from matrix pricing (which we’ll get into in the next section) and comparing to local market rates, what else do you need to know? Your true cost of labor, which is your labor cost per billable hour. To find it, use these formulas below:
Overhead typically comes out to 15 to 25 percent of wages for auto repair technicians at small shops, depending on benefits and workers’ compensation insurance rates.
Hourly cost = Hourly wage * (1 + Overhead percentage)
With 40-hour workweeks, there are 2,080 work hours per year. Some shops will budget for fewer hours, though.
Total annual labor cost = Hourly cost * Work hours per year
When you take away vacations, sick days, and time for breaks, most repair technicians only work an average of 1,770 billable hours per year. This number will vary by efficiency.
Labor cost per billable hour = Total annual labor cost / Billable hours per year
Congratulations! You’ve found your labor cost per billable hour. This is the number that you should never dip below – otherwise, there’s no chance of breaking even, let alone making a profit.
Now, to ensure profitability, you’ll need to determine your gross profit margin on labor and use it to find your profitable labor rate. We suggest aiming for a 75 percent gross profit margin on labor.
Profitable labor rate = Labor cost per billable hour / (1 - Gross profit margin percentage)
If this profitable labor rate is higher than the market rate, you will need to choose between:
Cutting into your gross profit margins. Ouch. This isn’t a good sign for your business and doesn’t resolve the core issue.Now that you know your profitable labor rate, you’re going to use that as your base rate before applying any additional multipliers for matrix pricing. Ready to try?
Below is a link to download the free template that we use to help our automotive repair shop clients see the benefits of matrix pricing.
However, it takes more than just correct labor pricing to be successful. That's why this template also includes information about the parts margins that we recommend to best complement the strategy.
Successful auto shop owners implement matrix pricing on labor from the beginning, but it's never too late to start using the strategy!
A monthly accountant works with you all year long, providing monthly financial statements, a dedicated monthly meeting, and addressing unlimited one-off questions. They also provide more detailed projects and insights with add-on consulting projects, such as:
Now that you know to base your rates on the local market, your profitable labor rate, and a labor matrix pricing template, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, find out which of the four different accounting solutions (full DIY, annual accounting, monthly accounting, or in-house accountant) is ideal for your shop by clicking the image below: