Sometimes the traditional methods we use to operate our businesses continue to produce the results we want. They have been used, passed on and, seemingly, withstood the test of time. They work consistently and predictably bring desired results.

The danger, however, is that sometimes we continue to use traditional methods without question because "it's just the way we've always done it." Even when a particular method is no longer working, instead of seeking a better one, we keep trying to force it to work by tweaking it this way and that just to avoid change. When we're asked why we keep doing it the same way, we explain, "That's just how we've always done it."

Having consulted with a number of automotive repair operations, I believe most traditional pricing methods fall into the category of "we've always done it this way," and that seems to be confirmed as I read articles in various industry publications.

I have seen many suggestions on how to adjust the old system to make it work in today's business climate. But when the old system is inherently flawed, that's like a technician continuing to do tuneups on today's vehicles with only a strobe light and feeler gauge.

This article will present the basics of a new and better way of calculating a profitable price for your work. First, just in case you haven't noticed any problems with the old system, let's look at some of the inherent flaws with certain aspects of the old system.

Ironically, while the traditional pricing method of multiplying flat rate hours by your shop labor rate and adding parts marked up by a percentage is considered to be one of the most reliable and consistent methods of pricing, its inability to provide consistently profitable job prices is one of its inherent flaws. This is true even if you have carefully calculated your shop labor rate and a standard markup percentage. Unless the type of work you perform is consistent in terms of complexity (value of parts used and the amount of time consumed per job), this pricing system is not likely to consistently achieve your profit goal.

Even if the type and amount of work you do is predictably consistent, it can only achieve your goals when it is dialed in to the correct shop rate and markup percentage. The problem is that it can cost you a lot of time and money while you attempt to get it dialed in using the trial and error method. And just because it might be working today doesn't mean it will work tomorrow. Changes in operational or market conditions may dictate the need to adjust it from time to time, and one of the biggest disadvantages to this method is that it will take at least one accounting cycle before you even notice a problem on your financial statements. Worse yet, it might take two or three accounting cycles to see a trend, and as rapidly as things change today, that may be all the time it takes to cause financial havoc for your business.

Watching the gross profit percentage on every job is another commonly taught and practiced method of confirming job profitability. It too has some inherent flaws. On a labor-intensive job with very few parts, though your gross profit percentage is above the target of perhaps 60 percent, your price may be too low to be profitable. And on a parts-intensive job with a small amount of labor, maintaining your target gross profit percentage may price the job higher than it needs to be to achieve your profit goals and too high to be competitive in your market.

There is a better, timelier method, and it is based on what accountants call Activity-Based Costing. We call it the Profit Index Factor (PIF) method, and it uses activity-based costing to arrive at an activity-based price.

The basic concept of PIF is finding and knowing the amount of money that must be generated for each hour of technician activity to cover the costs of doing business and allow you to reach your profit goals.

The limiting factor (assuming the market has greater demand than the business can deliver) in a service business is the amount of time that is available for activities required to perform the services for which customers pay. Time is the common factor in all auto repair and service jobs. Some jobs don't require any parts. Others require lots of parts. Some jobs don't generate any revenue - jobs such as reworks, free initial road tests, tire rotations, brake inspections and other loss leaders. But every job requires some technician activity and activity takes time.

Since technician time is the limiting factor, it makes sense to allocate a proportional amount of overhead cost to each unit of time spent on production activities. We'll use hours and tenths of an hour for our examples since that is what we are familiar with in the flat rate book.

Finding the PIF for your operation will require some thought regarding adjustments that need to be made to the traditional way we look at our businesses. The important thing to know about time is the number of hours that are available to bill on an annual basis. As you are aware, some of the hours that a technician spends at work are not spent on revenue-generating activities. Among other things, some time is spent on activities (or perhaps more correctly, on non-activities) like coffee breaks, waiting for parts and waiting for the customer to give a go-ahead. To stay current in today's rapidly changing arena, training must be done - and that also takes time.

And though you may pay your technicians for 52 weeks of time, they are not at work on paid holidays, vacation days or when they are sick. A well-structured operation with efficient technicians that beat the clock consistently can actually bill one hour for every hour the technicians are at work, but we find the shops that operate that efficiently are more the exception than the rule.

Next, you need to know the amount of overhead expense you will probably have during the next year. Your Profit and Loss statement from your last fiscal year is a good place to start. Add to or subtract from the expense items based on what you expect to have happen over the next 12 months. Leave out all the variable costs when you calculate this. Variable costs are the costs directly related to the repair job, such as parts, fluids and sublets such as towing and machine shop charges.

Now add the amount of profit you want to generate over the next 12 months. Include debt service, return on investment and any other reasonable profit.

Next, divide the annual dollars of overhead cost and profit by the annual number of hours you have available to sell. The result is your PIF, the amount of Cost and Profit you need to collect for every hour of productive technician activity you sell. This is the amount you must collect for each hour sold and produced to reach your profit goal.

Don't confuse your PIF with your shop labor rate. Think of your shop labor rate as only a market-driven number you show on your repair order to justify the selling price of the job. The PIF is used to determine the appropriate selling price of the job based on technician time sold. PIF includes your desired hourly profit so you will need to add your variable job costs like parts cost to the job PIF to finish your calculation of the selling price.

The basic formula for determining a job price with PIF is quite simple. Multiply flat rate hours by your shop's PIF and add the shop's actual cost of parts, oils, materials, sublets, commissions, and any other variable costs that are specific to this job. This gives you your target profitable selling price. Now that you know how much to charge for the job, you simply break up the total price and distribute it to parts and labor to justify the total repair cost on the repair order itself.

Today, you probably do a lot of jobs that require few or no parts. An example would be a job that requires diagnosis and then only cleaning sensor or ground connections. Would your shop still be profitable? What if you never sold another part and thus markup of parts no longer contributed to your bottom line? More and more repairs today require very few, if any, parts. Your shop's profitability is built into PIF, so even if you never sold another part, you will still charge enough. PIF eliminates the guessing and empowers you to make solid data-based decisions that ensure reaching your profit objectives.

When you have calculated your PIF, you know more about your business than most shop managers do, and you have a useful tool for managing your business. There are a number of terrific uses for PIF other than just determining the right job price, but these will have to be covered in a future article. In the meantime, you'll find that your shop will likely be more profitable by just pricing your work using the PIF approach.

Editor's note: This article is one of several management articles that will be contributed to AutoInc. this year by Automotive Management Institute (AMI) instructors. To learn more about AMI, its courses and instructors, visit www.AMIonline.org. Thom Tschetter has more than 20 years experience in the automotive industry and built one of the most successful independently owned automotive repair chains in the Pacific Northwest. In 1996 the U.S. Chamber of Commerce Blue Chip Enterprise Committee selected his transmission business as the No. 1 small business in Washington. As a business consultant, Tschetter is known for making the complex simple, getting business strategies off paper and into action, and generating instant, high-impact, bottom-line results for his students. His firm, ProfitBoost, is based in Bellingham, Wash. For more information, visit www.profitboost.com or call (360) 815-2055.

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