Determining Your Labor Rate

Like any business, finding the right price is always a challenge. Lots of questions may run through your mind:

    Am I charging too much?

    How do I factor in taxes?

    Should I keep up with competition?

    Is there a simple equation?

As an owner, you want to give a great value, but to give that value,  you need to charge fair wages.

“I used to be the cheap guy in town and I was oblivious to it,” says Tatsu Tsuchida, acting manager of Tokyo Automotive in Placentia, Calif., a seven-employee, 5,000-square-foot, $1-million-per-year business. “Determining the proper labor rate is important to keep up with technology, pay your guys right, make the shop look like a million bucks, and to attract the right customer—and to pay yourself properly.”

The entire 32 years that Evic Svedberg, owner of European Autowerks in Virginia Beach, Va., has been in business, he's always charged what he believes is fair. 

“Your labor rate is 50 percent of the equation,” Svedberg says. “When it comes to auto repair, 98 percent of it is labor and parts. If it’s half of the equation and usually 55 percent of sales, then it’s hugely important to have the right number.”

Tsuchida’s current labor rate is $140, while his diagnosis rate is $160. And for Svedberg, his labor rate is set at $129.22.

But how did these shop owners come up with their labor rate? Ratchet+Wrench sat down with the two auto repair shop owners for tips on how they determined their rate while ensuring maximum profitability.

1. Change your perspective.

Unlike Svedberg, who was never shy about charging what he needs for the job, Tsuchida went through a period of trying to believe in the value of his work and his shop.

Tsuchida says owners not charging enough and being scared to charge more aren't doing enough to warrant the expense. He says those underpriced shop owners are usually the ones content to pay the rent and feed themselves. They likely employ family, college students, and themselves to take advantage of the cheap labor, he says.

“We would balk at how expensive the dealer was, and how they would charge exorbitant prices for services customers didn't need, and we would cut corners because of it,” Tsuchida says. “After a while, we decided that we were shooting ourselves in the foot.”

2. Hold on to your ideal customer.

After recognizing he didn’t charge enough—or what he calls the second step of the “awakening process”—Tsuchida realized that he was scared that raising his labor rate would scare off customers.

Tsuchida says the frugal customer—which makes up 15–20 percent of the population—is roughly 30–40 percent of a cheap shop’s customer makeup.

“Our shop tanked during this stage, but somehow my parents stuck with my vision, and some of my better customers stayed,” Tsuchida says. “The better customers who stayed were generally the people who would randomly stick an extra $40 on our counter and walk away. Later, when we questioned why, they said, ‘You deserve more.’”

Although a lot of his frugal customers left, some did stay on to support (for more information on filtering out your bad customers and determining your ideal ones, head to ratchetandwrench.com/idealcustomer).

“I learned that if you work with some of them, they responded well,” Tsuchida says. “They might have to break the bigger tickets into two or three visits, but despite their budgets, they would rather have me working on it because they trust no-one else.”

3. Do the math.

Svedberg has never used an exact formula when trying to figure out his labor rate. He suggests instead to use a coach to help with rate. With the coach, you will discuss labor rates, the business as it was, if the business is profitable and if the rate needs to be changed.

But how does Svedberg track these numbers to determine this? Each week and each month, Svedberg puts everything about the business into a spreadsheet. This way, owners can see the issues and look at the trends to determine if the labor rate could be adjusted. Any price increase needs to be done through your labor rate, not parts prices, and Svedberg says to make sure to look at your effective labor rate and ensure that labor rate increases aren’t simply being made to make up for a low ELR.

3. Import the underlying factors.

“Go by the job and have a different labor rate for different things,” Svedberg says.

After you get the right number, owners have to consider other factors that affect this rate. Some important factors include: cars over 10 years old, market competition, cars over 20 years old, classic cars or over 30 years old, lower rate for friends and family, and specialty vehicles, such as motorhomes or Lamborghinis.

Tsuchida’s general policy for model year 2000 to 2012 vehicles is that his labor rate drops between $125-$140 from his initial cost of $140.

4. Check the competition.

To keep up, Svedberg cold calls dealerships and other auto repair shops to ask what their rates are. However, he suggests being smart with your tactics and using an outside source, as dealerships are getting wise about this tactic.

“Look at the market competition and look at what you work on,” Svedberg says. “Remember, European is usually at a higher rate.”

For Tsuchida, he checks the competition, but it’s not a part of the whole equation.

“Neighboring garages labor rate is a consideration, but not the only criteria,” says Tsuchida. “I don't mind being the more expensive shop, as most of my customers are not the price-conscious variety.”

5. Gage customer reaction.

When you have the right price point figured out, how do you implement it without customers getting upset? Svedberg says he’s never had to explain his rate; he only explains the price by the job and that the auto repair shop expects to make a profit and to make enough money to warrant the job.

Svedberg also advises a shop should rethink its labor rate every year, usually going up about 1 to 3 percent. And if you find you are really underpriced and need to go up a lot after looking at the numbers, Svedberg says to just increase it all at once—the customer won’t even notice such a change, as long as the job is explained correctly.

Tsuchida doesn’t have a problem raising his labor rate going forward and will adjust the price here and there to where it should be. If customers do make a comment about the price, however, he simply rattles off the benefits of why they do business with them—loaner cars, OEM quality parts, and a promise to not cut corners, for example.

“If they do not understand at that point, they are not likely my ideal customer,” Tsuchida says.