For most automotive repair shops, being able to diagnose and repair today’s vehicles can be a daunting task. As vehicles continue to evolve and embrace technological advances, one thing remains constant, in order for your shop to remain profitable you have to stay current with the latest diagnostic tools and equipment. How does an automotive repair shop stay current and afford the capital investment needed to purchase and maintain the necessary equipment? In an effort to help you build a more profitable automotive repair shop, we’re going to lay out a plan to help you accomplish this goal.
Let’s begin by analyzing the cost of doing Diagnostic work. You have to understand and accept that performing Diagnostic services in your shop is the most costly labor operation you can perform. Here’s why: Diagnostic services don’t generate parts revenue. Let’s look at the financial cost a typical repair shop with 3 technicians will encounter over a 1 year period.
[table id=2 /]
The answer lies in understanding how to fairly charge the right fee for diagnostic services. As we can see in the above example, most shops would be better off not doing diagnostic services if they could replace those jobs with regular jobs that generate parts revenue. However, in the real world, most shops won’t make that transition and will want to continue offering diagnostic services. So how do you know what is fair and what will create success for your shop in the future? Let’s look at how to determine what to charge for your diagnostic services.
In order to determine what a fair amount is to charge your customer, you first need to figure out what labor rate multiplier you need to apply to your standard labor rate. A labor rate multiplier simply means that for diagnostic services you are going to charge a higher labor rate than your standard labor rate. If your parts to labor ratio is 1-1 then you could easily determine that you need a 2.0 labor rate multiplier to recover the lost revenue. However, it’s just not that simple. You see there are times where diagnostic services do generate parts revenue. Most shop owners don’t have the time to track this, or their management system won’t track this category. Another way to do determine what labor rate multiplier you need is to create an annual budget for new equipment acquisition. As an example let’s use a budget of $30,000 for scan tools per year. Using the data from our table above we’ll determine what a fair amount is to charge.
[table id=3 /]
As you can see, with a simple adjustment in your diagnostic labor rate, you will be able to create an annual budget to fund capital expenditures on new equipment. This will ensure your business is able to stay current with the cars and test equipment of tomorrow. Going back to our labor rate multiplier, we have to remember there are other fees you will have to absorb to stay in business as a diagnostic repair shop. You’ll have subscription services, Factory level information access, technician training etc. So once you figure out your capital investment needed I would recommend adding an additional .1 – .5 to your labor rate multiplier. If we use an additional .1 to our above example that would put our labor rate multiplier at 1.34 ($24.04 is 24% of our $100 standard rate.) Our new labor rate would be $134.00 per hour for diagnostic services. Over the course of 1 year that would equal $163,212 in labor revenue generated or an additional $38,412 in revenue. I’ve included a worksheet below for you to use:
[table id=4 /]
In closing, this concept is an effort to help shop owners generate the revenue needed to stay current with the tools and equipment shops will need to diagnose & repair the cars of tomorrow. Take pride in the service you provide to your clients and don’t be ashamed of your fees. You now have an understanding of what it costs to stay in business diagnosing vehicles. The fees you need to generate represent the mental, emotional, time, and monetary capital invested to help your clients solve their vehicle concerns. If you charge accordingly, you will be rewarded. The shops that don’t will soon find themselves out of business. If you need training in how to sell these higher fees to customers please visit www.Advisorfix.com for more information on becoming a master at selling diagnostic services for maximum profits.