The average auto repair mechanic earns just over $44,000 a year. That amounts to roughly $21 an hour.
If you run an auto repair shop, you might wonder how that fits into your labor rate. Many auto repair shops aren’t as profitable as they could be because they set the wrong labor rate.
Plus, the effective labor rate is too low. Shop owners don’t know how to calculate this, so they don’t know how much money they leave on the table every day.
If you want to increase your profits, you have to do more to improve the labor rate. It’s not as complicated as you think.
Keep reading to discover how to make improvements to the labor rate and your shop’s profits.
Table of Contents
1. Measure Your Current Effective Labor Rate
What is the effective labor rate? It’s a measurement that tells you how much you bill customers and how much your mechanics cost.
To get the effective labor rate, you’ll divide the total labor cost by the labor billed to customers.
Let’s say that you billed $40,000 last month in labor to customers. You have three mechanics who worked a total of 480 hours during the month.
Customers get billed $100 per hour. In a perfect situation, you would have billed $48,000 instead of $40,000.
Divide the amount billed ($40,000) by the hours worked (480) and your effective labor rate is really $83.33.
Your shop is losing about $17 per hour. That does look bleak, but the good news is that there are strategies you can use to increase the labor rate.
2. Look at Your Financials
Once you have the effective labor rate down, you’ll need to look at your financials to see other areas that need adjustments.
Look at each repair job over the last few months. Are you discounting repairs too much? What’s your pricing strategy?
There are shop owners that set their prices based on what the competition is doing. Yes, you want to be competitive, but you don’t want to be so competitive that you lose money.
If you find that you’re giving away too many discounts, adjust your strategy. Discount low-cost jobs that don’t take a lot of time.
You can make a small profit on those jobs, but they also get people in the door. When the time comes for a major repair, you’ll be able to make money on the job. That increases the lifetime value of a customer.
Review your pricing strategy and how you determine prices. There are three ways to set labor times for auto repairs.
You can use a labor matrix, which lets you estimate labor times and add markups. You can also create custom rates using software.
Most shops rely on labor guides, which tell you the average amount of time to make a repair. The mistake made with these is that shop owners rely on them too much.
They don’t take into account the variables that impact the repair time, such as the age and condition of the vehicle.
3. Hire the Right People
Of course, you have to hire the right people to do the work. Mechanics that aren’t happy with their work are less productive and can lower overall morale.
Hiring the right people doesn’t always mean hiring the cheapest labor, either. Sure, that would improve the effective labor rate, but you’ll end up sacrificing the quality of repairs.
Customers won’t be happy and your shop’s reputation will decline over time. The next thing you know, you’re struggling to get customers.
Before you hire your next employee, think about the company culture you want to create. Write down the characteristics of your ideal employees.
Note the required skills and experience to do the work. You’ll be able to hire the right people and create a culture that values productivity.
4. Establish Performance Metrics
Do you have performance metrics in place? This is another area of opportunity for your auto repair shop.
Performance metrics give you insights into various aspects of your business. Customer service and retention, quote conversion rate, profitability, and sales targets are just a few metrics.
Tracking these metrics regularly will help your business become more profitable. Even slight improvements to these metrics will do wonders for your profits.
There’s a way to establish performance metrics without causing alarm among your employees. Explain to them that these are necessary to improve the business.
5. Create Better Estimates
Review your estimates and compare them to the actual repair. You might be underestimating the amount of time spent on a job.
Adjust your processes to ensure you’re charging customers for the total time it takes to complete the job.
6. Get Out of Their Way
Your management style might cause a bottleneck in your business. You might delay handing jobs over to mechanics or mechanics can’t get what they need to do their jobs.
Getting customers to agree to repairs is another cause of bottlenecks and delays. You can send text messages to customers to speed up the process.
The best way to find out if you’re the bottleneck is to ask your technicians. You’ll get an honest assessment from them.
7. Improve Training
One of the best ways to improve the labor rate and efficiency is to train employees on a regular basis. Provide training that lets employees further their careers.
Your shop benefits from the knowledge and they’re more productive and engaged in their work.
Increase the Labor Rate at Your Auto Repair Shop
Running an auto repair shop has a lot of challenges. You need to make sure that it’s profitable. The best way to do that is to set the right labor rates and know your effective labor rate.
The tips in this article show you how to calculate and improve your labor rates. Apply them to your business and you’ll increase your profits.
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