Has your business kept up with the cost of living? How does the gross domestic product play a role in your ability to keep up with the economy in the pricing of your goods and services? More importantly, do you know your company’s hourly cost of doing business?
According to U.S. Labor Department data published on March 10, 2021, the annual inflation rate for the U.S. was 1.7% for the 12 months ending in February 2021, after previously climbing to 1.4%. The next inflation update was in March 2021 at 2.6% over the previous 12 months.
I’ve known shops that failed to monitor or ignored the rise in the cost of living and other economic indexes and just stuck with the same labor rates for years – or even a decade! I’m also aware of shops that wait for an increase from insurers. Many shops have failed to keep their businesses alive and instead watched them die a slow death by a thousand cuts, including cuts in wages; personnel; profits; marketing; service; and cutting corners.
Boat Repair
I recently had my boat in a repair shop in Central Florida, and the shop’s labor rate was $119 per hour, regardless if it was for rigging, mechanical, electrical or hull repair. I winced but did not complain as I felt their labor rate was consistent with the level of quality and services they provided in the market area they served.
This was the same shop that repaired my boat’s transom due to a covered loss which my insurance company had covered and paid for in full…without objection or efforts to negotiate. They simply paid for the labor, parts and materials at my repairer’s rates without question.
The Only One
Because the collision repair labor rate is so woefully deficient across the country, it would not be prudent for a shop to revise and correct its pricing overnight. Insurers would be mad and no doubt do their best to combat the change by whatever tactics they believed necessary, including telling your customers that your charges are not within the area’s “prevailing competitive pricing” and suggesting that you’re attempting to overcharge them. The insurer would then likely pay only what they believed was owed and then force the customer to pay the difference out of pocket. The insurer would also tell their customer that your shop is “the only one” who charges more than the insurer wishes to pay.
Monitoring and adjusting one’s rates and fees regularly is simply good business.
An ADE repairer coaching/consulting shop client recently shared a conversation with me regarding his personal auto insurance carrier who had raised his premium. He had no losses or tickets and had no change in vehicles, and he asked the agent why his rates went up. The agent calmly replied that their company’s costs had risen, along with the cost of living, etc., and the insurer found it necessary to raise their rates. The shop owner then asked the agent, “Why, then, can’t I raise my company’s rates?” There was no reply.
Keeping Vigilant
There is no question that the collision industry’s prices have remained behind other goods and services across the country. To remain viable and have resources for marketing and growth, the collision industry needs to update its pricing over a reasonable but abbreviated period of time – and do so based on the nation’s economy, plus the shop’s overhead, costs of goods and labor, etc.
There is no question that the collision industry’s prices have remained behind other goods and services across the country.
At the minimum, I would suggest that repairers re-evaluate their rates and allowances no less than once a year. Due to the current economic climate, COVID-19 pandemic and the current administration’s policies, I would suggest doing this quarterly until things return to normal. I’m not suggesting that a shop should change its rates, but monitor the economy so as to not be caught off guard if and when a pricing adjustment becomes warranted. This is where repairers have been asleep at the wheel, resulting in stagnant rates that have impacted their ability to attract and keep quality employees. What once was a very lucrative and rewarding profession no longer pays enough.
Paying Techs
Many shop owners are being forced to pay their techs over half of their labor rates, in a sense making them senior partners in the business with no investment and no risk.
Repairers should be retaining 62% gross profit of charged labor, yet they’re paying techs far too much in order to keep them. When staff require higher pay, the shop owner/manager must raise their pricing to retain them as well as maintain the desired 62% gross profit on labor.
Many shop owners are being forced to pay their techs over half of their labor rates, in a sense making them senior partners in the business with no investment and no risk.
For example, if a tech is making $30 per labor hour flat-rate, the repairer should be charging no less than $80 per labor hour. This would allow the repairer to retain $50 per hour, providing a gross profit of 62.5% to cover expenses and be able to reinvest into the business.
Consider petroleum pricing and all costs associated with it. When the cost of crude oil goes up (dollars per barrel), gas and fuel prices go up, as do all products and services associated with petroleum products. This includes products such as paint, reducer/thinner, tape, plastic products, etc., as well as the suppliers/distributors’ costs to transport, handle and deliver the products to your shop. As your costs go up, they also should be passed on to your customer.
Market Comparison
Another sound business practice is to know how your company’s pricing compares to others in your market area that offer the same level of goods and services. Keep in mind that not all collision repair shops are the same and, as such, their rates and fees should be commensurate with their offerings.
Despite what many have been told, there is not merely one prevailing competitive price; as in any industry, there is a range of pricing based on the level of quality of the goods and services provided within the local market.
To establish your competitive pricing in your market, you first need to know what others are charging. There are several ways one can do this:
- Perform your own market survey by calling your industry colleagues in your market area(s) and asking them for their current rates and fees.
- Hire a company (i.e. surveymonkey.com) to conduct a survey for you within your immediate and surrounding market areas.
- Seek the information from companies like National Auto Body Research (NABR).
Share your findings with others by telling respondents that, once your survey has been completed, you’ll update them with the results.
If and when you do change your rates, I would suggest you do as I did and prepare a written notice on your company’s letterhead and send it out to all insurers and repairers who conduct business in your market area. This is not illegal, nor does it breach federal antitrust laws. You’re merely letting others know what you charge, not conspiring with others to raise their rates or boycott any entity.
DRP vs. Non-DRP
It’s important to put the insurer in the proper place in your mind and your business. Unless you have DRP relationships, insurers are not in charge of your business. And if you’re a DRP for one or more insurers, this does not mean you’re required to offer discounts and concessions to insurers you do not have DRP relationships with. As such, you should charge your full standard posted consumer rates and allowances with no discounts or concessions. After all, your true customer is the owner of the vehicle you’re repairing.
Your current non-DRP labor rates should be based on your company’s overhead (cost of doing business), competitive rates and allowances for repairers in your market area who offer the same level of quality, workmanship, service and warranties.
Not sure what you should be charging? Learn and know your hourly cost of doing business. You can’t know what to charge if you don’t know what it costs to operate your business. A standard formula for determining an hourly rate is to add up your labor and fixed overhead costs, add the profit you want to earn, then divide the total by your hours worked. This determines the minimum you must charge to pay your expenses, pay yourself a salary and earn a profit. Depending on market conditions, you may be able to charge more for your services – or you might have to get by on less until you can eventually be where you need to be.
Monitoring and adjusting one’s rates and fees regularly is simply good business.
