Demarest: The Power of Gross Profit Per Hour

I have been in the automotive repair industry for the better part of two decades. Over the years, I have been fortunate enough to see financials from just about every kind of auto repair business, from the quick lubes to restoration shops and everything in between. It always amazes me that there are so many ways to make money. Even further, how are some things the bane of my customers’ existence, like having oil change waiters, while they are the core customer group of some of my other shops? One customer doesn’t make sense to their business model, but it is the entire model of another.

People are always concerned about their percentages: how much can I make on this based on cost or leveraging their markups? Most shops are also concerned about how many hours their techs sell and leveraging their time. Leverage is great, but if you aren’t leveraging all of this in a productive manner, then the rest never works. If your technician is 100% efficient but you aren’t marking up their costs enough, no amount of production increase will help. If you are pricing your jobs through the roof but these same prices are hurting your overall sales, then you still won’t have enough gross profit dollars to pay your overhead.

Two Options, One Formula

So how do you measure gross profit and hours at the same time? There is something called gross profit per hour (GPH). This is an idea that you may have heard of or may not, but most understand the basic underlying principle, even if you aren’t currently measuring this. Even better if this is a new idea, because it could shift your thinking on what is profitable and what is just a sale.

The way that most people start on a job is generally directed toward either margin in dollars or margins in percentages. I am going to give you two examples to show you why GPH is the only real thing we need to measure, because it factors everything. The first example is if we did something just based on percentage alone, would you rather sell something for 10% or 100%? Most would quickly say 100%, but the true answer is we don’t know, and even further, what we want to know is how long will this take me? You have $100. Would you rather make $10 in a minute or $100 in one year? What is actually happening is you are measuring GPH now and probably changed your decision.

One that might sound more familiar is what I see in a shop sometimes when you chase gross profit dollars, again ignoring the time it takes to create those. Will you make more money doing a water pump for four hours or a cabin air filter for 15 minutes? The water pump job pays us $600 in gross profit, or in other words, we make $150 GPH. On the surface, the cabin air filter job doesn’t look as attractive at $50 of gross profit, but that only took us 15 minutes. In the same hour period, we are making $200 an hour by doing cabin air filters versus water pumps.

You want to know how tire shops and quick lube businesses stay in business? They have mastered the idea of GPH. They will never have sky-high margins; most of them are in the low double digits. They will never have sky-high gross profit dollars; a lot of the tickets are pretty small. Few businesses are able to do it at the speed that they do. If you make half of the money of someone else per job, but you do it at twice the speed, you are making the same amount of money.

Still not making sense? If you are selling your oil changes for $150, you are probably making $50 on that job, and it took your tech an hour. Your GPH is $50. On the other hand, the quick lube did two oil changes in an hour with their efficiencies, at half of your price; you guys made the same amount of money. What I really find, though, is that once people find out that speed is a lot of times more important than price, like the quick lube industry has, they are actually doing it at three to four times the speed. So price is less, margin is less, but efficiencies are higher, meaning that you, as the business owner, make more money.

Take a Closer Look

At the end of the day, this is an idea that most people understand, but you are taking it as an assumed number and not something that you should analyze or improve. Most people would look at their current hours and make this same sort of relationship with their gross profit and, in turn, their goals. If your current hours are 200 a month at $20,000 of gross profit, it would be logical to set your hours target at 250 if you want to make $25,000 of gross profit (GP).

What happens when you aren’t concerned about GPH? You end up hitting your target of 250 hours but notice that the margins have slipped and you are still making $20,000. What really happened is your GPH went from $100 to $80. Now that we understand the idea of GPH, we can go back to our team with options: if we are going to sell this at $100 GPH, we need to sell 250 hours. If we can only sell 200 hours, we need our GPH to be at $125.
I always say you can work harder or you can work smarter, and gross profit per hour is the easiest way to measure and set these targets. If you want to work harder, it’s a pretty simple formula—just do more hours. However, if you ignore the idea of GPH, you could end up working harder just for the sake of working harder. A smart business owner understands these concepts and not only figures out how they can make more money and better margins, but do all of this faster and more efficiently.