Your shop makes profits from both parts and labor. Adjusting your pricing on parts to make a profit is pretty straightforward. But labor times for auto repair shops? That’s where things get a bit tricky.
In order to keep your lights on and keep your technicians happy, you need competitive labor rates (you know what they say: “happy techs, happy shop”). But, of course, you also need to keep those rates reasonable so you don’t scare off your customers with sky-high prices.
There are three ways your shop can make more money on labor:
Which method you end up using depends on the unique circumstances of your shop and the unique circumstances of each job. Just like no two snowflakes are alike, no two auto repair shops or repair orders are exactly the same.
But before we dive into the differences between these three methods for setting the best labor times at your shop, let’s get a quick refresher on the thing they have in common: the labor guide.
As you already know, a labor guide is the backdrop of labor times for auto repair shops. It tells you how long, on average, it takes to complete different types of jobs. But, remember that the times listed in labor guides are averages, so it’s best to treat them as a starting point; there are details that can affect the accuracy of those times.
Let’s take a look at some of the complexities and factors to consider when determining how much to mark up (or mark down) your shop’s labor rates.
We all know that longer jobs create a greater likelihood of complications. Your technician is tasked with replacing an engine, and after they open the hood, they realize that the connecting parts need an upgrade, too. To offset repair work that wasn’t included in the original estimate, you can charge customers more for all jobs over a certain amount of hours.
Wine gets better with age, but cars do not. Older vehicles are often trickier to fix, especially because finding parts for them can require a time-consuming, pain-staking hunt across all the parts shops in town. You can make up for the time spent hunting down uncommon parts by charging more for all repairs involving older vehicles.
Sometimes customers make repairs lengthier without being aware of it. You know who we’re talking about: that customer who keeps calling your shop to change what they want in their RO, or that other customer who pulls you aside for 30 minutes to argue about a line item before they sign off. That’s all extra time for your shop that you can account for by upping the cost for customers that you know will take a bit more time out of your day.
Say your shop is in the dry city of Phoenix, Arizona. The desert climate in Phoenix might not be kind to cars’ paint jobs but it’s fairly forgiving to the parts under the hood. If you’re an auto body repair shop in Phoenix, you’ll probably need more time for body work. But if you’re a general auto repair shop, you’re not likely to run into rust, which can add time to the repair.
However, if for some reason you wanted to move across the country to Syracuse, New York—the snowiest city in America—you’ll find yourself working with cars that have rust. That rust will add time and headaches to repairs. What you charged in Phoenix likely won’t be high enough for the repairs you’ll be dealing with in Syracuse.
Plenty of us have been there: the end of the month is creeping up, you look at your shop’s numbers, and your heart sinks. You might not hit your gross profit goal for the month. In that situation, you may want to increase what your shop is making on labor to hit your gross profit target.
Do you have an experienced technician who can crank out jobs faster than Kevin Harvick’s pit crew? Chances are, you’re already paying them a higher base salary or hourly rate. However, certain situations might call for cranking up those numbers, like if you really need to put their skills to the test for a tricky repair that a client wants done ASAP.
Speaking of customers who need their cars back fast, it’s okay to charge them a premium. When you’re asking technicians to complete a job faster than the time on the labor guide, and still do a good job, the customer is getting special service. So if you have a customer who needs a repair done ASAP because they absolutely need their car for a road trip, you can offer them a “Pro Tech” rate, where your most experienced tech wraps up the job in record time. But, be sure to let that customer know that that speediness comes with a surcharge.
You know that customer who’s been getting all their repair work done at your shop for the past decade? It’s a good idea to consider giving them a special rate as a token of appreciation.
Now, with that being said… Some industry leaders advise sticking to your labor rates as much as possible. While giving discounts might be the right thing to do in certain situations, they warn against making it a habit. They say that if it becomes a habit, you risk financially harming your business. Ultimately, when it comes to giving discounts, use your discretion and instincts as a business owner.
We know, we know. It’s tempting to base your pricing for labor on what the guy or gal across the street is doing. But remember: your goal is to determine the right pricing for your shop. All shops have their own set of circumstances, even if they’re right across the street from each other.
Okay, so a labor guide is the foundational piece for your shop when you’re setting labor rates. But it’s important that the labor guide you pick is reliable and stays up-to-date with the latest labor times in the industry. Just like you wouldn’t stick to the same Yellow Pages year after year, you shouldn’t stick to a labor guide that’s stuck in the past.
We know what you’re thinking, “Who uses the Yellow Pages anymore? I can find all that on the internet.” But there are some shops that still use physical labor guides while easier-to-use digital labor guides have become standard. The advantage of a digital labor guide is that it can be continuously updated. Not only are you saved from buying a new book every few years but you will also have labor times for newer vehicles.
Specifically, you should look for a labor guide that:
Let’s explore the differences between the three ways your shop can make more money on labor. To refresh your memory, those three ways were:
Starting with the labor matrix, you can think of it as a tool that ramps up the labor rates depending on how long a job takes, and puts that extra money back into your shop.
Similarly, custom labor rates also increase the labor rates for each job by enabling you to set a special hourly rate for different categories of work, such as work done by a pro technician, work done for family and friends, and work done on luxury cars.
Finally, the labor guide markup is a tool that boosts the hours allocated to the technician, increasing the money they make from a repair.
In scenarios where jobs take a long time and it requires an “all-hands-on-deck” approach, it makes sense to use a labor matrix. With a labor matrix, you can automatically apply markups or multipliers to jobs based on time ranges and how long the job takes to complete.
To broadly look at when using a labor matrix makes the most sense, let’s recall a common expression: time is money. Like we mentioned earlier, sometimes customers will add time to repairs even when they didn't intend to.
For example, you might have a customer who’s very fickle; they constantly change their mind about what they do and don’t want done on their repair. They might even keep you tied to your phone, talking your ears off about the job!
By using a labor matrix, you can bump up the labor rates and protect your shop’s time and avoid that nagging feeling that you’re losing money on a repair. To increase those labor rates, you can use a simple or compound calculation. Let’s take a look at what each entails.
A simple calculation is, well, simple. For example, for any job between zero and four hours, you can bump up the total price by 15%. For any job between four and eight hours, you can bump up the total price by 25%—and so forth. At Tekmetric, we’ve seen most of our users rely on the simple calculation approach, as it makes it easiest for them to be straightforward with their customers.
A compound calculation makes calculating labor rates a bit more dynamic. If you have a job between zero and four hours, you could mark up the first hour by 5%, the second hour by 7%, the third hour by 9%, and the fourth hour by 11%. Each hour within a range gets marked up by a slightly different amount. Some of our users at Tekmetric do like the compound calculation, and we say, more power to them!
Whether you use a simple or compound calculation, you can get to your desired labor rate via markup or a multiplier. Essentially, these are the same things written in two different ways: a markup is a percentage and a multiplier is a decimal.
Much like learning how to repair a vehicle, creating a labor matrix is something that makes more sense once you get your hands dirty. Don’t worry, it’s not like The Matrix; you won’t have to hack your way into a computer simulation filled with freaky agents.
The cool thing about Tekmetric is that it has a built-in labor matrix that makes it easy for your service advisors to apply the appropriate markups or multipliers to all repair orders.
And that’s not all. After you build your labor matrix within Tekmetric, your service advisors can automatically apply it to repair orders.
How to make a labor matrix in Tekmetric:
Step 1: Go to “Shop Settings”
Step 2: Navigate to the “Markups” tab
Step 3: Scroll to the bottom of your screen and select “New Labor Matrix”
Step 4: Start configuring your labor matrix by inputting start hours and end hours. Add additional ranges as needed.
See? No bullet-dodging involved.
Sometimes, like when you’re putting the pro technician on a job or helping a loyal customer, you’ll want to use a custom rate instead of a labor matrix. Specifically, when you use custom labor rates to apply discounts, you’ll be safeguarding the technicians’ time (they won’t take a hit to their hours or pay because you want to offer a customer a lower price).
For example, let’s say your brother Mark, aunt Sally, and next-door neighbor John are regular customers. You want to give them a special rate but don’t want to go back to your labor matrix and make that tweak each time they walk in. Instead, you can set a custom labor rate (you can call it “Family and Friends’ Rate”) and apply it to the relevant ROs. Or, let’s say you want to give back to teachers in your community by offering them discounted repairs. Same principle—just create a custom labor rate (in this case, you can call it “Teachers’ Rate”) and add it to the ROs of any teachers you serve.
With Tekmetric, you can make custom labor rates in an instant. The best part? Customers won’t see these custom labor rates, and you can create as many different types of rates as you’d like and apply them to ROs.
How to make custom labor rates in Tekmetric:
Step 1: Go to “Shop Settings”
Step 2: Navigate to the “RO Settings” tab
Step 3: Select the top option on the left-hand side of your screen, “Labor Rates”
Step 4: Start configuring your custom labor rates. Name them and add the rate for each (remember, your customers will never see these rates!)
Step 5: When creating an RO, add your custom labor rate of choice by using the dropdown menu under “Choose labor rate”
Just like the Jackson 5 famously sung… A-B-C, easy as 1-2-3!
Labor guide markups are best to use when it seems like a job is going to take longer than the estimate in the labor guide, and the technicians will be dealing with the brunt of it. Why use a labor guide markup instead of the labor matrix or a custom labor rate? When a technician is working hard to get the job done right, those extra hours (and cash) should go back to them.
Maybe an older vehicle stops by your shop, one that you’re astonished is still cranking along on the road, and you know that the technicians will need extra time on it because of the complications that come with older vehicles. Or, maybe your shop services luxury cars as well, and the technicians will have to take extra care to return that Ferrari to its owner in pristine condition. That means the technicians will have to slow down to keep dents and scratches at bay.
With Tekmetric, you can auto-apply labor guide markups to the built-in labor guide in a flash. What’s more, you can keep these markups as long as you want, and with the click of a button, you can remove them!
How to create a labor guide markup in Tekmetric:
Step 1: Go to “Shop Settings”
Step 2: Navigate to the “Markups” tab
Step 3: Scroll to the bottom of your screen and select “Labor Guide Markup”
Step 4: Select the box that states, “Auto-apply markup on labor items added from the Tekmetric labor guide.”
Step 5: Add the percentage that you want to use for your markups.
Ultimately, by adjusting your shop’s pricing for labor—whether by creating a labor matrix, making custom labor rates, or using a labor guide markup—you can ensure that you reach your desired profit goals in a balanced manner that keeps everyone happy.
As you go about deciding which method to use and when, here are a few additional tips to keep in mind.
First, try to avoid making a habit out of raising labor prices primarily at the end of the month; customers might start to notice and spread the word that repairs are more expensive during those times.
Additionally, it’s important to be fair to your customers and the technicians at your shop. So, exercise good judgment when it comes to deciding which method to use. As your labor rates go up, so will your shop’s ARO. But there’s a danger in only sticking to the labor matrix or custom labor rates. Your shop’s technicians will become unhappy if they see that the shop’s bottom line is growing, but they’re not getting additional money for their hard work.
And last but not least, remember that the more experienced service advisors at your shop will instinctively know just how much to adjust prices, and when a particular method is most appropriate. They likely won’t need to turn to written guidelines or instructions each time. However, make sure you train your less experienced service advisors and coordinate with them to create a streamlined process for applying each method. That way, you can minimize the chances of misunderstandings and miscommunications at your shop—and maintain an environment that everyone is happy to be in!