“Forecasting Service Net” - #5 Effective Labor Rate.

There are seven things you control that directly influence your Service bottom line.
    1    Calendar Utilization
    2    Daily Clock Hours
    3    Number of Technicians
    4    Proficiency
    5    Effective Labor Rate
    6    Gross Retention Rate
    7    Expenses

This installment deals with Effective Labor Rate.

Why is it important? 

As I mentioned earlier, the only thing a service oriented organization has to sell is time. Everything else follows that. You buy it from an employee and sell it to a customer.  You need to know how much you are collecting per hour.  

At this time of year store owners are often faced with decisions about pricing and compensation. You are trying to decide if you should raise your prices or if you can afford to pay the technicians more.  Until, and unless, you know how much an hour you are actually collecting, you cannot determine either.  

Let’s say you post your labor rate where everyone can see it (In some states you must).  Let’s say it is $120.  It’s a lie and you know it.  You can’t avoid it. It is a lie because you seldom collect that amount.  Competitive items get priced down to match or beat the competition. Some jobs get discounted so you can capture the work. Many services you do for free to create or maintain loyalty. Technicians sometimes take far longer than you expected when you quoted the price (Some states require that you stick to your quote within a certain range). It also depends heavily on your work mix and the type of work you do! There are so many reasons you don’t collect your posted rate. 

Customers look at your posted rate and assume anything you do is going to cost them $2 a minute.  They know they don’t make that much and are hesitant to even talk to you about things they might like above and beyond their primary need. To make things worse your technicians look at the posted rate and wonder why they may only be getting paid $24 for every one of those hours.  If you are really keeping 80% of every dollar you collect you are probably too busy spending your money to be reading this post.   We’ll look at this more closely when examining “Gross Retention Rate”. 

You can have a low effective labor rate and be having one of the best months you have ever had.  Let me explain.  Let’s say you do a promotion of a simple maintenance item that is steeply discounted and brings a flood of new traffic to your store. It fills your shop. Many up-sells and a few unit sales are made.  You add several first time customers to your client list. The high volume of discounted items makes it look like you are doing a bad job even though you rock!!!  Who wouldn’t want a shop full of work over and empty one with a high effective rate!  It would be great to have both.

So, how do you accurately assess your effective labor rate?  You could just divide whatever you collect by the number of hours you were open.  What if it is low?  There are so many reasons why it might be low and too little information to diagnose why.  Remember this is a LABOR rate.  When thinking of profit, it refers to how much you sell each billable hour of labor you purchase. 

Using the Numbers Worksheet, the forecast breaks out the number of hours you were open, the number of hours the technicians were working on jobs and the number of hours you were able to bill customers.  It divides the labor sales by the billable hours for each technician and for the entire shop.  You can use it to run different scenarios and see the impact on your bottom line.  i.e. Add the cost of a promotion for a simple, repetitive maintenance item.  Bump up the tech efficiency based on how quickly they can do it compared to a more difficult repair.  Increase the gross retention rate based on the fact that lower paid technicians will be doing these jobs.  There are other things to consider when doing a promotion, but this will tell you if you will make more or less money doing it. 

How do you increase your effective labor rate? If your prices are not obviously lower than your competition and market, just raising them isn’t an option unless you provide service that is noticeably different and valuable enough to charge a premium for. You may be able to increase it in several other ways.

• The number one way is to add additional items by requiring a thorough inspection of every vehicle, boat or motorcycle every time - no exceptions.  Don’t present anything to a customer until you have the inspection in-hand. 
• The second way is to attract work that you can charge your highest rates for.  If you have enough customers to keep busy, advertise items of value, not necessarily the cheapest.
• If you do need to advertise the cost leaders, combine the offer with an additional item that you can charge more for.
• Keep technicians.  Treat turnover as a kiss of death.
• Constantly train your technicians to be able to efficiently handle those difficult but lucrative jobs. 

Next:  Controllable #6 - Gross Retention Rate.

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