WHAT IT IS: The difference between the revenue of a job and the cost of completing it as it relates to labor, excluding all overhead costs.
HOW TO CALCULATE IT: Job (or repair order) revenue – labor
INDUSTRY AVERAGE: 60–69%
OPTIMAL BENCHMARK: 70–75%. Labor varies wildly and really represents a KPI that can make or break your shop. Look at the difference between shops that tracked gross profit on labor and those that didn’t:
Gross Profit Margin
- Shops that tracked KPIs: 63%
- Shops that didn't track: 41%
Gross Profit Margin on Labor Above 50%
- Shops that tracked KPIs: 67%
- Shops that didn't track: 39%
HOW TO IMPROVE IT: Every minute of your staff’s time is valuable—every minute in service to a customer should be billed. Missing opportunities to bill customers due to relatively new practices in auto repair—such as diagnostics—is wasted time and money. Not charging (or not charging accurately) for diagnostics will hurt your gross profit labor dollars in ways you never thought possible. It will also have a negative impact on effective labor rate and ultimately your bottom line.
Overcoming the idea that you shouldn’t charge for diagnostics often comes from a surprising source—the technicians. The perception for many is that they simply have to plug in a computer to a car and the software spits out a clean answer, and that is false. It takes time to correctly diagnose a vehicle, understand the codes and react appropriately. The most common technicians diagnosing vehicles in a small shop setting are often the most senior technicians who understand more than anyone that their time is valuable.
The most savvy shops understand diagnosis as an increasingly critical part of the initial inspection and bill it according to gross profit per hour—what they need according to weekly, monthly and annual gross profit goals.
Because most diagnoses take roughly an hour, bill them accordingly to make up for lost parts and service time; an accurate result will save you more in the long run anyway. Many owners use a labor matrix in addition to a parts matrix, and diagnostic billing is often 1.4–1.6 the normal hourly rate.
Be prepared to train your service advisors into how to properly sell a diagnostic test; it’s about value to the vehicle and customer safety, not about finding ways to charge an extra $100. Be transparent and show customers the device, explaining in simple terms the long-term value the diagnosis offers in a rapidly changing marketplace.
