Increasing Your Net Profit Margins
SHOP STATS: D’s Auto & Truck Repair Location: Holland, Mich. Owner: Daris DeGroot Staff Size: 10 Shop Size: 6,000 square feet Average Monthly Car Count: 200 ARO: $700 Annual Revenue: $1.7 million
David Rogers, president of Auto Profit Masters, has spent more than 20 years advising repair shops. In that time, he’s seen countless businesses that pull in millions of dollars of revenue—but barely any profit.
With parts prices increasing and a technician shortage in full swing, that is becoming even more common as the margins get thinner and thinner, he says.
According to the 2021 Ratchet+Wrench Industry Survey, roughly 40 percent of shops have a net profit margin between 10 and 20 percent. However, the mark of an excellent operation is above 20 percent, where roughly 20 percent of shops fall, according to the survey.
Daris DeGroot, owner of D’s Auto and Truck Repair in Holland, Mich., was close to giving up on his business about 10 years ago as his shop struggled to maintain much of any net profit. Then just a transmission shop, DeGroot committed to becoming a full service repair shop, and along with that committed to changing his processes and mindset. Now the business is thriving.
So what can repair shops do to boost their net profit margins? Ratchet+Wrench spoke with Rogers and DeGroot to find out.
Check numbers daily.
When Rogers begins working with a shop that has low profit margins or is looking to increase average margins, the first thing he recommends is measuring KPIs daily. Rogers sees too many shops that don’t look through their numbers until the end of the month or every few months.
“So often, a shop is looking backward at a month that’s already over,” Rogers says, which forces shops to become reactionary instead of proactive.
And it goes without saying, track your profit margins. Nearly 20 percent of respondents in the 2021 Ratchet+Wrench Industry Survey said they don’t track their net profit margin at all. Without tracking, businesses have no idea how they are doing, Rogers says. But daily checks should go beyond just profit margin.
Rogers wants his clients to check all of their numbers every day—even multiple times throughout the day. Look through all the technicians’ efficiency and productivity numbers. Look at service advisors’ closing rates, and look at the general health of the business. How many cars did the shop see today? How does that compare to yesterday? How does it compare to last week?
Establishing this baseline allows the shop to tweak other aspects of the business and fully understand if that tweak made a difference to the profit margins. If a shop is changing things on the fly, looking back over a month isn’t going to tell an accurate story of what worked and what didn’t.
DeGroot looks through his numbers quite regularly. For him, a better profit margin came not only when he began regularly tracking, but with what he was looking at. At first, he was only looking at what the company was spending, and trying to cut costs there to help the profit margins. However, where the tide turned for his shop was not being so concerned about spending, instead making sure the shop was maximizing their efficiency, productivity and car count. That has allowed him to grow his gross profit margin to roughly 65 percent. The increase in net profit margins followed once his mindset shifted towards boosting productivity, not cutting costs.
What worked for DeGroot was picking a different metric every month. He’d start with parts gross profit. Once he got that to where he wanted it to be, he’d move on. The next month was labor profit and so on. Slow and incremental growth, he says.
Find the right pay plan.
Picking the wrong pay plan is one of the most destructive things you can do to your profit margins, Rogers says. What Rogers sees more than anything at shops that are struggling are poorly constructed pay plans. In his experience, big guarantees, salaries and hourly wages hold shop owners hostage with their profits.
“Pretty much every shop I see that is struggling, I can trace it back to the pay plan,” he says.
For that reason, Rogers recommends most shops start an incentive-based pay program. Whether it's a straight flat rate or a mix of flat rate and other incentives, motivating the technicians to complete more work is going to drive up profit margins as more emphasis is placed on productivity and efficiency.
DeGroot implements a pay plan at his shop that is basically a standard flat rate system with a few tweaks. The system goes off book time unless something unusual comes across the shop. All the advisors have their own plan. Same for the technicians.
Rogers is hesitant to give a one-size-fits-all approach. DeGroot’s strategy might not work for a shop that’s 10 minutes from him. Every shop situation is different, thus the pay plan should be different.
And incentive-based pay plans aren’t fool proof. Rogers remembers working with a shop that built a pay plan that didn’t anticipate the large growth it ended up having. A year later, the shop owner was asking for Rogers’ help because his service writers were making $200,000, the shop owner wasn’t taking anything for himself and his profit margins were suffering. So don’t just take your competitor's pay plan and expect it to work for your shop, he says.
“You can’t build the perfect pay plan and fix every shop,” Rogers says. “If your goal is to get the best outcome, everything has to be unique.”
You should also consider the mental makeup of the staff, Rogers says. What is going to get through to them? Be flexible given an employee's experience. For example, DeGroot’s plan includes some guarantees for new employees, so they have time to train and learn without having to worry about turning cars right away. As the employee settles in, slowly they transition to a fully incentive-based program.
Find your blindspots.
Roughly 10 years ago, DeGroot was close to closing his business. In an effort to keep the business alive, DeGroot sought coaching. There, it was recommended to him to begin transitioning from a transmission shop into a full service shop and to begin marketing, for which he had little experience.
Through that process, he came to realize what the “right” customer was for his business and began to market to it. The shop went from doing three or four cars per day to now doing about 10 per day. His average repair order also increased. Nowaday it fluctuates between $600-$700 depending on the work the shop is doing, and DeGroot is on pace to do $1.7 million in revenue in 2021.
“As we improved our customer base, our rate of sale went up. Then we were able to pay more people and buy better equipment, which led to a great decline in our inefficiencies,” DeGroot says.
That wouldn’t have happened had he not sought out help to identify his blindspots. With someone giving him that 30,000-foot view, DeGroot was able to turn his business around and grow his profit margins. A big step to improving profit margins is understanding that they need improvement, and being able to objectively look at the business to see what needs help, Rogers says. And if you can’t do it, hire someone that can.
“A lot of shops are struggling and worried about maintaining revenue with limited help,” DeGroot says. “Use tools that are available to us.”