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Hunting for ProfitPosted 11/5/1997By Rick Sharbrough
Many independent repair shop owners are afraid to make a good profit. They have the twisted mentality that charging a price high enough to ensure adequate profit is dishonest, or ripping off the customer. Why is that? Probably because they know someone else is selling the same type of service nearby for less money. I say, "So what!" You are selling honest, competent, personalized service. I ask you, "How much are you worth?" I have heard all kinds of responses when I suggested to other shop owners how much they should be worth. Their responses usually sound like this: "I can't charge that much _ I couldn't sleep at night if I did _ People in my area don't have that much money _ My prices are already the highest in town _ I am afraid I would lose customers if I charged that much." I have wrestled many of these same feelings. We can come up with all kinds of excuses for our weak resolve to be profitable. However, that is just what they are - excuses _ not reasons! Stop feeding yourself those tired lines. Make a decision to run with the "big dogs" and be a profit hound. Once you've made that decision, you need a basic plan for profit. There are three key areas to being profitable:
After you have control of your costs, the next key is pricing. Of course, each competitor must make his own decision about how much to charge. Agreements among competition concerning prices are forbidden by antitrust laws. How much should you charge? The answer may lie in how much it costs you to generate sales. Take a look at sales for last year. Decide how much additional profit you need and divide that amount by last year's sales. The result is the amount you need to raise prices to achieve your goal. For example, consider the following figures from Shop X, which wants to increase its profit by $60,000:
Shop X would therefore need to raise prices by 16.7 percent to achieve its goal of increasing its profits by $60,000. Assuming no loss of customers, Shop X's net profit percentage would change from 10 percent to 22.9 percent. Of course, the shop is likely to lose some price-sensitive customers. But even if it loses customers, Shop X should still end up making a significant profit. Consider again the example previously provided; this time, the average profit per repair order (RO) has been calculated:
It was also previously calculated that to make an extra $60,000 in profit, Shop X would have to raise prices by 16.7 percent. The following table shows the average figures assuming the number of ROs remains the same despite the price increase:
Notice the average ticket price has risen, directly increasing the average profit. Now let's consider what would happen if, after increasing its prices by 16.7 percent, Shop X were to lose 33 percent of its business:
*While the average costs per RO would not stay the same in reality due to fixed costs being spread over fewer tickets, the difference would not be substantial in most cases. Since the number of ROs decreased by 33 percent to $1,600, sales dropped significantly, but so did costs. The profit percentage remained the same, and Shop X made a profit of $64,000 despite sales decreasing by $80,000 over current sales ($360,000-$280,000). If Shop X remains with the current sales and prices, its profit will be $36,000. If Shop X raises its prices, even if it loses 33 percent of its business, its profit will be $64,000, which is $28,000 more than not changing prices at all. The charts given show the difference a small price increase can have on a shop's bottom line. They also show how a shop can make the same or more profit even if it loses some price-sensitive customers over its new pricing. As you investigate the impact a price increase will have on your customers and various jobs, and the effect that possible changes to your employee compensation methods will have on the attitudes of your customers and employees, you may begin to hear voices. These little voices will say you can't do it, telling you the crew will revolt and walk out, or that your customers will go somewhere else. Don't listen! You should be the one walking out over a pay check that barely reaches minimum wage. Take control of your situation and have the same consideration for yourself and your own family's needs to charge enough. Finally, share any profit over your needs. That does not mean change prices to inflate sales numbers and then give customer discounts that negate the increase. It does not mean raise the labor rate but then reduce the time you charge for a job to keep the prices down. It does not mean changing employee compensation methods and then bonusing them until no benefit to yourself results from the change. Your service writers can get pretty creative when it comes to resisting change. Watch your gross profit numbers every day to make sure the net effect of your price changes are getting to the bottom line. The sharing comes after you have realized an adequate profit from the business. You might want to set aside one or two percent of sales for bonuses and charity. The point is to share from the excess after you have received a fair wage yourself. Many times shop owners have heard exhortations to charge more. When they see the kind of prices they need to charge, they go into denial and resist change for fear of what others might think. Some have asked me, "Can you sleep at night charging those prices?" The answer is a resounding, "Yes!" My advice is to stop undercharging. What kind of self-respecting person would deny their family a decent living? What kind of person goes deeper and deeper into debt to cover for under-pricing? What kind of person will stay late at work day after day, and even work weekends, denying their family quality time together just to cover for under-pricing? Can that person sleep at night? Maybe they work such long hours to avoid dealing with the reality of their fear. What about you? Are you going to sit on the porch with the profit weaklings or run with the big dogs? Making a profit is not immoral. We should not feel guilty for making money. It is time to get up off the porch of under-pricing and stop worrying more about everyone else but yourself and your own family. Take control of your situation and start tracking the profit you deserve. Release the hounds!
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Copyright (c) 1996-2008. Automotive Service Association. All rights reserved.
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Far too many shop owners are struggling to make a profit. Unfortunately, the lack of profit is unnecessary in most cases and can be overcome without increasing business. Our industry is filled with honest, hardworking individuals who frequently lose the battle for profit mentally long before the first work order is written. Many others simply need a plan to ensure profitability. This second group would implement a plan if they knew how, as opposed to the first group who, even knowing how, lack the courage and conviction to actually do it. If you are tired of working long, hard hours for meager wages and you are ready to run with the "big profit dogs," keep reading. If not, stay on the porch of profit mediocrity. The choice is yours.
