Have you ever wondered why some auto repair shops thrive while others struggle to make ends meet? It all comes down to one key factor: margins. In our latest webinar, industry expert Cecil Bullard shared five essential steps to grow your profit margins and make your shop more successful. Whether you’re just starting out or looking to fine-tune your operations, these insights will help you understand what really drives profitability.
Let’s dive into the key takeaways from the webinar that every shop owner should know.
Why margins matter
Cecil kicked off the session by explaining why focusing on margins is critical for any shop. “If you don’t have margin, you don’t have profit,” he emphasized. It’s not just about how much business you bring in—it’s about how much of that revenue turns into actual profit.
For example, Cecil broke down how even a 10% drop in your gross margin can drastically reduce your net profit. “If you’re doing a million dollars in business and you miss your margin by just 10%, you’re not making $200,000 anymore—you’re making $100,000,” he explained.
Know your target margins
The goal is to have a gross profit margin of around 62%, but as Cecil noted, if you’re loading your labor costs (including workers’ comp and taxes), you should aim for 74% to 80%. The key point? Your margins on both parts and labor need to hit their targets, or your net profit will suffer.
Cecil summed it up perfectly: “You deserve to make a fair profit. Decide what that is, and stick to your parts matrix.”
Implement a parts matrix
One of the simplest ways to improve your margins is by using a parts matrix. A parts matrix is essentially a formula that determines how much you mark up different parts. Lower-cost parts might be marked up by 3.8x or even 4x, while larger, more expensive parts will have a smaller markup, balancing everything out to achieve your target margin.
Cecil shared this important piece of advice: “Don’t be afraid to charge what you need to. If a customer isn’t willing to let you make a profit, maybe they’re not the right customer.”Â
Cecil shared this important piece of advice: “Don’t be afraid to charge what you need to. If a customer isn’t willing to let you make a profit, maybe they’re not the right customer.”
If you’re currently marking up parts at just 38% and you raise it to 48%, you could bring in an additional $27,000 a year, even if you’re a small shop.
Raise your labor rates
Here’s something Cecil feels strongly about: most auto repair shops are undercharging for labor. “Our labor rates aren’t enough to pay technicians what they need, buy equipment, or get the training required,” he said.
To put things in perspective, Cecil compared auto repair rates to those of plumbers, electricians, and HVAC workers, who often charge between $300 and $500 an hour. Meanwhile, the average labor rate in the auto repair industry is still sitting around $128, according to an AutoLeap survey.
“Honestly, we need to be charging $250 to $350 an hour,” he argued, pointing out that the complexity of modern vehicles justifies higher rates.
Focus on efficiency
Efficiency plays a huge role in increasing profitability. Shops with inefficient processes lose money in the form of wasted time and resources. As Cecil mentioned, improving your technicians’ productivity directly impacts your labor margins.
“You can have a great gross profit per hour, but if your technicians aren’t efficient, that profit gets eaten up elsewhere,” Cecil warned. By focusing on streamlined operations, you can ensure that every hour billed translates into profit.
Overcoming productivity barriers
Cecil also touched on productivity barriers that affect profitability. He compared productivity issues to bricks in a wall, with barriers divided into “company bricks” (like scheduling and tools) and “employee bricks” (such as work ethic and attitude). The manager’s role is to identify and remove these bricks to help both the company and employees achieve their goals.
When productivity improves, businesses can generate higher labor margins without increasing employee wages, leading to increased sales and profit. Cecil emphasized managing workflow, equipping technicians properly, and fostering a positive culture to boost productivity.
Addressing labor leakage and workflow
Labor leakage is a common issue where time spent diagnosing or inspecting a car isn’t adequately charged, leading to lost revenue. Cecil advised better management of technician and service advisor time to capture more billable hours.
He also suggested improving communication between technicians and service advisors. Clear communication about what a car needs and why can streamline the estimating process, reducing inefficiencies and boosting productivity.
Pricing and service approach
Cecil advocated for a shift in how services are offered. Instead of promoting just oil changes, consider offering broader vehicle services that include inspections. This approach allows you to charge more and reduce unbilled time.
The impact of marginal gains
Small improvements can lead to substantial revenue gains. For instance, optimizing parts margins, adjusting labor rates, reducing leakage, and streamlining workflows could result in nearly $400,000 in additional revenue for a shop. Even achieving half of that could be a game-changer.
Closing thoughts
A better work environment, with streamlined processes and fair compensation, leads to happier, more productive employees. This, in turn, benefits the shop’s overall performance.
In conclusion, focusing on these key areas not only improves profitability but also enhances the work environment, making your shop more efficient and engaging for employees. Want to watch the whole webinar to know all these tips in detail? Here you go.Â
