As I write this month’s column, summer seems to be rushing toward me at autobahn speeds. I can’t explain why it happens, but the adage that time seems to speed up as we age certainly seems true. By the time you read this column, the Fourth of July holiday will be upon us, along with ubiquitous fireworks, barbecues, and social gatherings. There could be a popular chorus of “Raise Your Rates!” But now may not be the time to do so.
Raising labor rates is typically an easy, effective and painless way to generate more revenue. It certainly seems to confirm another adage that “sales fixes everything.” A higher labor rate can allow us to avoid less undesirable or unprofitable work, while reducing our liability exposure by having the flexibility to reduce car count and risk of employee burnout. By raising your labor rate, you can afford to divest yourself of those customers who cause you the most problems. The name for this is the Pareto Principle, commonly called the “80-20 rule.” One variation of this principle states that 80% of customer complaints originate from the bottom 20% of our customers. In another variation, it is said that the top 20% of our customers can provide 80% of our revenue. The higher labor rate allows us to focus our energy and effort on keeping those clients happy while also providing more time to introduce our service to our targeted ideal customer. Based on these attributes alone, it’s easy to see why raising labor rates is so attractive. But don’t kid yourself, there are pitfalls too.
A typical dogmatic mindset of many shop owners is that since they have been underpaid for so long when compared with other trades, they are well past due for an increase. They compare their capital expenses for equipment with those of other trades and note that by comparison, we have some of the highest expenses but are frequently the lowest paid. Raising labor rates therefore seems entirely justified and long overdue.
One of the many problems with this justification is that these rate increases are frequently arbitrary. They are seldom the result of a thorough analysis of the business financial statements or daily operations. Often times an owner will state that the increase corresponded with inflation, but he or she didn’t perform any meaningful research to determine what that inflationary increase actually was. It’s also not uncommon for coaches to suggest periodic increases on a quarterly or other schedule so that it outpaces actual inflation. In my more than 26 years of shop ownership, I have only heard one coach advise shop owners not to exceed a 9% increase at any one time because a 10% increase would likely yield pushback from customers.
A false assumption made by many shop owners is that there is no point at which a consumer can say no to repairs, especially if not fixing the vehicle means it won’t start, stop, run or steer. Many shop owners insist that owning a car is an absolute necessity and the customer will simply have no choice but to pay. These thoughts, while emotionally satisfying, provide a false sense of security and are unrealistic. While the customer may refuse the repair at your shop, there’s generally always someone who will perform that repair cheaper.
I recently read about the concept of reaching a customer’s “threshold of pain.” This was defined as the point at which prices are raised until customers say no. I believe that point for many shops has been, or very soon will be, reached but not by their own making. It’s no secret that concerns about the economy played a big part in this most recent election. Hastening arrival to that point by raising the labor rate within the next six months is ill-advised in my view. According to a recent article in “Repairer Driven News,” just over half the population is reported to be living paycheck to paycheck, unable to afford an unexpected car repair.
What’s a solution? Look within. Instead of looking to raise our rates, let’s commit to the difficult task of seriously evaluating the deficiencies of our current operations and making improvements. By focusing on productivity and efficiency, we can retain our current customer base while increasing revenue and customer satisfaction.
