Tom Denton: Things I wish I knew then… Part 2

…that I know now!

Hourly rate

The hourly rate charged in many garages is based on what they think sounds about right and would be competitive. When I first started in business this was what I did because I thought it was the only way to get work – that is, to undercut the competition. Wrong, for many reasons! The first of these is that there is an absolute minimum you should charge based on your costs. Let’s take a simple example of a one-person business in a small industrial unit. There are five main steps:

  1. First, work out what pay you need to take home. For example, mortgage/rent, car payments, food, utilities, entertainment and anything else appropriate. As a figure to work with, let’s say £25,000 a year.
  2. The next step is to calculate your business expenses. For example, rent/rates/utilities, tools and equipment, marketing, IT equipment, website/hosting, vehicle and costs, office costs, training, memberships, bookkeeping/accounting/legal and bank charges. Take care calculating this but let’s say it is £30,000 per year.
  3. The total cost of being in business is the sum of the two figures above: £55,000
  4. Now we need to work out your chargeable hours remembering that you can only work a certain number. You need time for management, business admin and other general duties like clearing up, and don’t forget holidays and sickness: Let’s assume: 20 days holiday and 8 bank holidays, 3 sick days and 104 weekend days (you may choose to work Saturdays so adjust as required but remember you do need time off). That is a total of 135, so the available workdays are 365 – 135 or 230. Considering a few basics like lunch and the other roles, let’s assume as a technician you can book 6 hours a day. Your chargeable hours per year are 230 days multiplied by 6 hours, which is
  5. Finally, your minimum hourly rate is the total cost from above, divided by chargeable hours (£55,000/1380), which is about: £40

You need to be more accurate than this and also note that even achieving 6 hours booked every day is a challenge!

Figure 3 Time (Image by theTrueMikeBrown from Pixabay)

Final point here, is that this is an absolute minimum and makes NO profit – it just pays your running costs and modest wages. Profit is not a dirty word so I’d be thinking at least £60 per hour, but let’s dig into pricing a little further.

Pricing

I will leave the mark up on parts out of the discussion here, but will add that you should have one. When I started in business, I looked at what others were charging, guessed a figure and off I went!

A key thing that it took me some time to learn was how to charge for diagnostics – probably because I was so hung up on the concept of the hourly charge out rate. The obvious error here is that as you get better at diagnostics and as you spend more money on better equipment, you get faster at the job so earn less – and that is crazy!

Diagnostic work should be a fixed price and using the figures we calculated above I would charge a fee of about £80. Notionally I would expect this to be no more than an hour but you will win some and lose some – just make sure you win more! The key thing here is to be absolutely clear, in advance, what the customer gets for their money. For example, if the fault is

  1. fairly simple then this fee will include a fix – a new fuse, or an obvious loose terminal for example.
  2. not simple but not too complex then they get an accurate diagnosis and a quote for the repair – a new lambda sensor or an EGR valve perhaps.
  3. complex then they get a quote as to how much more it will cost to find the fault and that the fixing of the fault will also cost extra.

A complex fault is the customers problem – you are their solution.

Figure 4 Making money is why we are in business (Image by OpenClipart-Vectors from Pixabay)

Other jobs may need to be priced from book times but there are a things, such as servicing, that can be fixed price – so that if you do it quicker it is to your benefit.

One more thing about prices – customers get their car only after they have paid the bill unless they are a company with a longstanding special arrangement.

In the process of carrying out any work, then new parts will be needed. When young and naïve I thought they were all much the same quality – wrong again, more on this next time.

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