I just finished a Profit Maximizing webinar with a group of shop owners.
Some great questions came up and I want to share one of my recommendations with you.
The question was “how do I determine what to set my labour rate at?”.
A profitable shop typically pay their technicians 25 – 30% of their shop labour rate; the other 75% to 70% belongs to the shop.
Here’s how to reverse that into a labour hour rate.
Method 1
Calculate what you pay your technicians on average, loaded (that means including payroll taxes).
Let’s say it’s $35/hour
Take the Hourly Rate of $35 and divide by 25% = $35/25% = you’d get a rate of $140.
Repeat this process but try the 30% end of the range = $35/30% = $117
Now you have a range to work within that relates to “industry” approximations.
This is a great rule of thumb, but because shops might have very different fixed expenses, I like to do this using a shops actual financial data.
Method 2 (caution you should ensure your financials are accurate)
Taking into consideration your shops actual expenses and your individual expectations for net profitability (lets use my target 20% from champion level aftermarket shops).
Using the following figures from my benchmarks document (recommending 1/3 of each tires to labour to parts sales):
| Total expenses (including shop labour) | $676,250 |
| Total net profit (after owner wage) | $248,750 |
| Add back dividends (if you withdrew dividends) | $Dividends |
| Total expenses & net profit & dividends | $925,000 |
| Divide by portion of fixed expenses that are covered by labour sales (in my case it’s 1/3) | /3 |
| Divide by estimated weeks open per year | /48 |
| Divided by estimated labour hours per week (9hrs x 6 days per week = 54 hrs/week) | /54 |
| Minimum required effective hourly rate = | $119 |
I like method 2 because it is based on the real effective rate required for the shop to attain the “Maximum Profit” benchmarks I promise to my shop owners.
Was this helpful? Do you use one of these methods to calculate your shop rates?
Cheers,
M
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