"Forecasting Service Net" - #6 Gross Profit Retention 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 Gross Profit Retention Rate.

As I mentioned in an earlier post, the only thing a service oriented organization has to sell is time. Everything else follows that. You buy time from an employee and sell it to a customer.  What you have left over is gross profit.  Gross retention rate is how you measure it.  It is the percentage of the sale that you retain after wages. Gross profit is what pays the bills and if there is more of it than there are bills, what remains is net profit.  Net is what you keep.  It is yours!  We’ll discuss this further in the next post.  

Any time you want to make a decision about pricing and compensation you need to consider your Gross Retention Rate. It seems like it should be simple to understand and control. Raising sale prices without raising wages increases it.  Raising wages without raising sale prices decreases it.  It is far more complex than that.

In the last post I talked about your Effective Labor Rate and how it varies.  You can post a rate, but you are never going to collect that exact amount. Unless you are tracking Effective Labor Rate closely, you really don’t know how much you are collecting for every hour you purchase.  It is the same with how much you pay for labor, or technician wages.

Let me illustrate how this all impacts gross retention rate.  The very simplest example would be a shop with only one technician who gets paid flat rate.  Flat rate pay is a fixed amount per hour billed to a customer. You would think you have absolute control over your cost of labor per hour.  It should be the same for every hour you sell to a customer.  Here is the catch. If there are hours you pay the technician for that you cannot sell to a customer or need to discount, your gross retention rate is going to take a hit.  You are paying for time that you cannot sell, or sell at full rate.

Gross retention only gets more complex from there. If your technicians are paid hourly or a salary, you labor expense is fixed regardless of how many of those hours you sell.. You have a break even point.  Let’s say you want to retain 70% of your sales.  You will need $3.30 of sales for every one dollar of wages.  Until you sell that much your gross retention rate will be below 70%.  Once you sell above that amount it all goes directly to your bottom line.

If you have a shop with several technicians with several pay levels it really gets interesting and adds to the complexity.  Now, the type of work and who is doing it has an impact on how much your gross retention will be.  Work mix makes a huge difference. If you give your highest paid technicians jobs that are not your highest priced work, gross retention suffers.  The opposite is true.  If your lower paid technicians can competently perform higher paid work, the gross retention increases.  

Why is it important?  The higher you increase your gross retention, the sooner you retire you expenses.  The sooner you retire expenses, the more money you have left over to enjoy.  

What to do?  Use the Numbers worksheet to track your gross retention rate every day so you can make adjustments if you need to. Don’t wait till the end of the month. Match the work you bring in to the pay level of your techs and vice versa, match the pay level of your techs to the work you bring in.  In other words, unless you have an empty shop you need to fill, don’t advertise price leaders.  Advertise the value of higher priced items. When you do bring in discounted items ensure they go to the lower paid technicians.  This means balancing your workforce to match what you are offering in your market. It would be great if you had all master technicians.  Unfortunately, unless you are a specialty shop that provides a service no one else does, you need to be competitive.  To be competitive you need to control your cost of labor. 

Next:  Controllable #7 - Expenses