Pricing - June 2006

Labor Rate:Why You Need It
By Kevin Farrell

Whether you have a fixed location or a mobile operation, you need to have a labor rate that will cover the expenses of operating the business — plus make enough of a profit.

In the February 2006 issue of Auto Laundry News, we examined the issue of “time” in our business. In that article, we looked at why there is no such thing as an “average” time for a detail job. We considered the many variables involved that determine how long a vehicle should take to complete. A detailer needs to determine how long it will take to complete a vehicle before giving a customer a price. Many detailers, however, get confused about how to calculate a labor rate, which will ultimately determine the price of the job.

EVALUATE THE VEHICLE

It’s always extremely important to actually view the vehicle to determine how long the job will take. We know a black SUV will take considerably longer to detail than a small silver coupe. Also, other variables such as the overall condition of both the inside and the outside of the vehicle and the customer’s expectations will add or subtract time spent on the job.

Most detailers will quickly learn to determine how long it will take them to complete the job to the customer’s expectations once they see a vehicle. For many reasons, however, knowing the time it will take to complete the detail does not translate to a profitable job.

WHAT IS THE JOB WORTH?

Everybody has a different level of skill. Some detailers will be able to complete a vehicle in a far shorter timeframe than others will. Some detailers have more experience, they use better products and equipment, or they just work a bit faster than others do.

It’s not necessarily about how fast a detailer works or how much more skill he possesses compared to others. Rather, it’s about what the job is worth in terms of time. Since there is no set standard for any vehicle, this becomes a bit arbitrary to figure out. However, we have all worked on black SUVs as well as small silver coupes to figure out how long each one of these usually takes to complete.

In a car dealership or other repair shop, they use published books to determine the proper amount of time it will take to repair the vehicle. For example, a tune-up on a certain model has a standard labor time. So does a brake job or engine replacement because the labor operations will always be the same. The job will be worth that amount of labor, regardless of how quickly or slowly the person gets the job completed.

LABOR RATE

In any business, the price charged to the customer is determined by the labor involved, plus the cost of materials. Unfortunately, in the detail business there is no “book” to look at to determine a labor time. Many shops just arbitrarily pick a price that seems good, or is close to what the guy down the road charges. Therefore, they really don’t know if the price they charge equates to a profitable job.

Before determining a price, you need to know how much money to charge “per hour” so you will make enough money to cover all your expenses and still be profitable when the job is completed. This is the labor rate. It needs to be set higher than you think because of the expenses involved to run the business.

A few thousand dollars’ worth of detail equipment that a skilled detailer uses to correctly and efficiently detail a vehicle justifies a higher labor rate than that of the operator who has no such equipment.

Expenses
You need to look at how much it costs to open the shop every day and stay in business — recurring expenses such as the rent or mortgage, the utilities, your employees’ salaries, insurance, advertising, product and equipment costs, water and sewer use, phone, and more. When these are all added up at the end of the month, it’s a big number. These expenses have to be covered before you make any money.

This is why the labor rate needs to be set at a higher rate than you ultimately look to pocket per hour. Of course, limiting expenses is always a great way to add to the bottom line, but there will always be expenses that need to be paid. The labor rate needs to cover your expenses, plus make you a fair profit.

Calculating Labor Rate
To truly make enough money in any service business, you need to have a high enough labor rate. However, we have to be smart in calculating a labor rate. Sure, we all want to make as much money as possible, but having a labor rate that is too high will hurt business. Many car dealerships have labor rates that are near $100 per hour. Some people in very specialized fields of work can charge even more than that per hour. Unfortunately, in the detailing business we can’t charge labor at that rate because it will price most customers out of the market. On the other hand, having a very low labor rate will mean that almost every job will be priced below what it should be and this will hurt profits.

The labor rate you charge should be researched and calculated based on the area of the country you are in and how expensive it is to conduct business in that area. Because detailing is such a labor-intensive business, the labor rate you charge can mean the difference between being profitable, barely breaking even, or worse.

Why You Need a Labor Rate
A labor rate is necessary to make sure the vehicles are priced correctly. Arbitrarily picking a price out of the air or pricing your services at or near the competitors’ prices is not the way to make money. When you have a set labor rate, you will multiply that rate by the number of hours it should take to complete the vehicle. For instance, if the job should take four hours and your labor rate is $42 per hour, it’s a $168 detail. If you want to add a small cost for chemicals, that’s fine as well. This will not mean your true profit is $168 on that vehicle, but it will ensure that you are correctly pricing each vehicle to ensure maximum profit.

As stated before, there is going to be a cost of doing business that will bring that “per-hour” number down considerably. Some detail shop owners are actually making less money owning the business than if they worked for somebody as an employee. This is because they either have a very low labor rate or none at all.

Labor Calculation Mistakes
Having a labor rate and sticking to the calculation is critical. Many times the calculation will seem high if it’s done correctly. This scares many detailers, and they will lower the price to a friendlier number that people are used to paying. However, you need to be true to the labor rate and the correct amount of time it takes to complete the job and keep it priced that way to stay profitable.

Another labor rate mistake is charging the customer based on the time it takes a very skilled detailer to complete the job. For example, if a detailer is very skilled and uses all the best equipment and products to make the job easier, it will take him far less time to complete the vehicle than an average or unskilled detailer.

If you know that a vehicle will take an average detailer four hours to complete, but you have the skills and equipment to get it done in three hours, you still need to charge the customer four hours of labor time. Do not charge the customer three hours because you can get the job done in that amount of time. Remember, you spent a great deal of money for the best equipment and products. You also have the skill and knowledge to make a car look showroom new. There is no reason to basically “discount” the price because you are so talented. Stick to your guns and stick to the correct labor time and rate.

Discounted Labor Makes for Poor Work
If you are always worried about what the “competition” charges and lower your prices to match theirs, you are basically lowering your labor rate. Or, if you only charge three hours for what should be a four-hour job, you are also giving the customer a discount.

In the long run you hurt yourself. You are leaving money on the table by either discounting the labor time or rate. When you run into a tough problem on a car that you have basically already “discounted,” you end up spending more time on it than you have charged the customer for — and you hurt your profits even more.

Another profit-draining scenario is this: You know you are taking too long on the vehicle and you end up rushing to get it finished. This will lead to poor work and a vehicle that does not look as good as it should. So with the discounted labor rate and time charged, you rush the job, do poor work, and the customer ends up dissatisfied. All this because you were trying to give him a discount, or were afraid of losing the job if it was priced out correctly.

Afraid of the Competition?
There will always be competition. I don’t care what the guy down the road charges, or concern myself with the coupons he offers. You must realize that even though the “competition” appears to be very busy, they may not be making any money because of the cheap prices and low or non-existent labor rate. I let them have the bargain shoppers and coupon clippers. I only want the jobs that are going to be profitable. There is more than enough work for everybody in all pricing zones.

If you choose to do the job correctly and make sure it’s done to perfection, it will need to be charged more time. Also, if you have spent a vast amount of money on tools and equipment that not only help you make the vehicle look its absolute best, but save you time in the process, the customer should not get any kind of labor discount. There will always be so-called “detailers” who do this as a hobby, or have no equipment other than a can of wax, a bucket, and a towel. They are usually the ones with the cheapest prices because of low or no overhead. This does not mean you have to come down to their level. The way to ensure that you will always make money is to charge the correct amount of time at the correct labor rate.

More Skilled Work Equals a Higher Labor Rate
I charge an even higher labor rate for more skilled operations such as wet sanding, overspray removal, stain removal, or paint work. There is more skill involved in each of these operations, so my labor rate is even higher. I know that if a customer had to bring his or her car into the body shop to have portions of the vehicle repainted because of scratch damage or overspray, they would pay hundreds of dollars. The same would be true to have carpeting replaced because of stains. With more skilled operations such as these, you can charge more money but you will still be “saving” the customer money in the long run. The repairs will be near perfect and customers will not be without their vehicle for an extended period of time. It’s a win-win situation for everybody.

The bottom line is you are in business to make money. If you are skilled and knowledgeable and have the best facilities and equipment, you are entitled to charge for it. In the long run, you will have customers who value the service you provide and a customer base that will pay a fair price for a great job.

Kevin Farrell owns and operates Kleen Car (www.kleencarauto.com), a full-service auto-detailing business located in New Milford, NJ. Kevin is also an instructor for a detailing program he developed for, and in conjunction with, BMW of North America. His background includes auto dealership experience and training through DuPont, General Motors, and I-Car.

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