Tips to setting shop labor rates

As a new shop owner, it can be difficult to know how to set your labor rates so that you walk the fine line between charging too much (and not attracting customers) or too little (and not making enough profit). When Edward Caswell, owner of Full Throttle Automotive, first opened his shop in Evansville, Indiana, in 2014, he had no idea where to begin.

“How do you know what good looks like if you’ve never seen it?” Caswell said of his early days as an owner.

When he first started his shop, Caswell said he called around to other shops to see what they were charging, and then set his rates below those to attract customers. For almost four years afterward, Full Throttle made a net profit of 2.7%, just enough to allow Caswell to pay the bills.

But after he went to a MEMA Aftermarket Vision Conference in 2020, Caswell knew he needed to change his approach. Now, he reassesses his labor rate every quarter, with the shop owner and his team examining their P&L to determine the following:

• Overhead cost per hour
• Tech hours
• Tech cost
• Net profit per hour

Using these numbers and more (other examples include state regulations, the cost of living, the demand for their services, average wages in the area, and other geographic factors), Caswell determines how many billable hours he needs to cover his overhead cost. This tells him how much he needs to charge for those hours.

Currently, Caswell’s labor rate is $130 and can go as high as $170, depending on the job. For example, if a customer brings in a custom car with their own part, he charges a higher labor rate to make up for the part cost. This means that for Caswell, he may pass on customers looking for an exact labor rate.

“We don’t want customers that are price shopping,” Caswell commented.

But passing on some customers has not hurt Full Throttle. Currently, the shop has a net profit of 20.74% and makes $5.3 million in annual revenue.

Culture and labor rates

However, one key part of Caswell’s labor rate has less to do with the numbers and more to do with his people. Part of the reason Caswell can charge as he does is because he’s set a culture in his shop that highlights efficiency and productivity, but does so in an upbeat way that encourages growth. This creates higher productivity, so Full Throttle can turn a profit without constantly raising prices.

As an example, Caswell’s shop has a technician productivity rate that’s usually between 115-120%, including oil changes. The shop owner said that his team achieves those rates because they know that by turning as many hours as possible, they can keep their labor rate low enough to attract customers, but high enough to get the kinds of customers that they want.

“You need to set your business up to encourage your team to be efficient,” Caswell said, and he’s done so by bringing his team to events such as MEMA’s VISION conference and other SEMA events. This helps them understand why they need to be as productive as they are.