All businesses are cyclical in nature, and like the rest, auto repair shops also experience lower profitability during certain months. But how does the industry stack up in the long run, and is it worth starting or buying an auto repair shop?
Data from IBISWorld reveals that the North American auto repair industry is valued at around $66 billion, with around 265,000 shops operating. These shops cater to around 290 million vehicles, based on research conducted by Hedges & Company.Â
The numbers indicate a potential for profit in the sector. But how much can an auto shop actually generate, and is it worth entering the industry? Let’s find out.
Industry trends
An IHS Markit study shows that people have been holding on to their cars for 11.8 years. Each car (given that it comes in twice yearly) can make around 24 trips to the mechanic for regular maintenance during its lifetime. Depending on how much your average repair order (ARO) size is, this can be a sizable sum.
What affects profitability at an auto repair shops?
Several things affect an auto repair shop’s profit margins. While some are purely business-related, others depend on how auto repair shop owners tackle problems. Let’s discuss some of them.
1. Customer experience
One of the best ways to ensure profitability is by delivering consistent results that build customer confidence. However, it’s important to note that other factors also affect your revenue streams.
-  Quality of output: Your work speaks for itself. If customers come to your shop and feel confident that their cars will be in top-notch condition when it’s time to pick them up, they’re likely to come back to you. This also helps attract more potential customers, since people who have a good experience at your shop are likely to refer your business to their friends and family. Word-of-mouth marketing is one of the most powerful forms of advertising and can help you build a base of loyal customers!
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- Attitude towards customers: By treating cars and their owners with respect and going the extra mile, building customer loyalty becomes an easy task. You can show customers what work their cars need by leveraging tools like digital vehicle inspections (DVI). Always tell customers you’re concerned about worn parts instead of presenting recommendations since this makes them feel like you care. Doing so can go a long way, especially when working with younger car owners.
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- Communication skills: Maintaining an open line of communication with customers is extremely important. Always present estimates in total—including taxes. If customers feel like they’re being fleeced, you can lose them. Inform customers if repairs are delayed and tell them why. Showing honesty up front to new customers is a great way to boost retention and develop a loyal customer base.
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- Inclusivity: When someone walks into your shop, make sure to treat them well regardless of their age, race, and gender. It’s important to add more women customers to your customer base, since data from Statista indicates that they own around 35.4% of vehicles in the US.
- Convenience for customers: Providing your customers with a comfortable and seamless shop experience is a great way to encourage repeat sales. Give your customers free coffee in the waiting room. Communicate with them effectively, and let them know that their brake replacement is going well. Take advantage of mechanic repair shop software and allow customers to pay easily right from their phone. A few seconds saved here and there go a long way!
- Customer service skills: Cars are one of the most high-involvement investments an individual makes. As a result, customers can be extremely picky about how you should treat their cars. Mechanic shop software like AutoLeap allows you to add detailed notes about customers so that you can cater to their needs. Additionally, it’s important for auto repair shop owners to hire people who can handle crisis situations well, since this can impact what others think of your business—for instance, when you’re dealing with unhappy customers.
Happy and loyal customers are likely to leave you positive online reviews, which is instrumental in building trust in today’s digital age. Many customers prefer going to local businesses for their needs, so providing excellent service is a win-win situation.
2. The margins you charge
While most auto repair shop owners enter the industry to help others, they need to be mindful of their bottom line. Owners have to maximize their labor and parts margins to ensure they’re competitive and continue to grow their business.
Most auto repair shop owners look to maximize their labor margins since competition from dealerships makes it difficult for them to charge a premium on parts. Here are some factors that dictate your labor profit margins:
- Your labor hours: Every auto repair shop should aim to maximize productivity by getting the best labor times. The fewer hours your techs spend working on each vehicle, the greater your car count per day can be. However, make surethat your quality of service doesn’t suffer as a result of working on more cars. Managing your labor costs is crucial to your bottom line as a repair shop owner.
- Employee training: Shops with an aggressive growth mindset know the importance of training their employees. Even if you hire the best auto mechanics, the auto repair industry is rapidly advancing, and the only way to keep up is by developing your technicians’ skills. A skilled technician can help boost the size of your average repair order (ARO), which improves profit margin and boosts productivity.
An auto repair shop looking to boost profit margins will benefit from providing their employees with excellent service and their technicians competitive wages.Â
Remember, you can charge higher margins while operating in a specialized field. Do you work on hybrid and electric vehicles (EVs)? Can your techs work on vehicles with advanced driver assistance systems (ADAS)? If not, there’s plenty of room for you to improve profitability.
3. How well you manage time
Auto repair shops need to prioritize the right things to be profitable. Auto repair scheduling software can help out in this regard. It’s important for auto repair shop owners to ask themselves:
- Am I over or under booked for the day?
- Will there be a steady stream of customers in my shop year round?
Without proper scheduling, shops run the risk of taking on more appointments than they can handle, leading to poor customer service and output quality. If techs are tired, they’ll make mistakes. On the other hand, if your techs are sitting idle, you’re paying them for hours they’re not working. This can not only affect your profit margins, but can also reduce employee morale.
Similarly, shops need to prepare themselves for the auto repair slow season. There will always be a higher car count in certain months, but shops can’t afford to make a loss during the rest of the year. Using software allows shops to determine when a car is due for scheduled maintenance and plan the year accordingly, allowing for a predictable flow of income every month.
4. What tools you use
It’s important for auto repair shops to invest in the right tools. The equipment at your shop will degrade and lose accuracy. While some tools can be recalibrated, wear accumulates over a period of time and can damage customers’ cars or hurt technicians working on them.
While replacing old tools is important, here’s a list of things auto repair shops should consider investing in:
- Apps: While some apps for auto repair mechanics are free, others are premium. These apps offer OBD2 code directories and detailed tutorials for technicians to make the best use of their time. Whether you need to keep track of your technicians, develop a marketing strategy, or remind customers about an appointment, a good auto repair software can help do it all.
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- Auto repair equipment: As technology advances, so do the cars coming into your mechanic shop. Your best bet is to embrace technology and invest in the latest tools. Not only will they help you complete repairs faster, but newer tools are safer and more accurate than older ones. It never hurts to invest in the latest equipment for your own auto repair shop if a one-time investment can boost productivity and increase profit margins.
- Auto repair software: Why would you need auto repair shop management software when your business seems to be running fine? It helps you make more money, save time, build trust with customers, and find out where your shop is doing well and what can be improved using live reports. You can take advantage of a built-in customer management system to keep track of a customer’s preferences. This is vital to deliver a valuable service and keep customers happy.
Wrap up
Running an auto shop can be a lucrative venture if done right. With a growing number of older cars on the roads, there’s an opportunity for auto repair shops to up their game and make these car owners an integral part of their customer base. It’s crucial to stay ahead of the competition, especially for an auto repair shop looking to boost profit margins. A good place to start that is by looking at electric vehicles and how you can service them.
Now that you know the factors that determine profitability, perhaps it’s time for you to start your own automotive repair shop!
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