Who here hasn’t had enough of them?
If you raised your hand, then please accept the highest of fives from us, because you’re about to learn even more about margins today.
A few weeks ago, we wrote about margins—specifically, why you should look at margin, rather than markup, to gauge how your shop is doing.
That’s cool, Fullbay, a lot of you, we presume, said at the time, but how do I decide what my margin should be?
So here’s the thing. A lot of people aren’t comfortable saying, “here’s what your margin should be” because it’s going to be different for everyone. Your margin depends on your unique brew of circumstances, which include your location, your competition, your employees, and everything else that goes into running a shop. We can’t say, “Build in 15% margins to everything you do” because that may not work for you.
What we can do is give you a better understanding of what goes into margins so you can make the right decision for yourself. To help us out, we turned once again to Irvin Bowman of Truck Shop Network, better known around the office as The Margin Man.
(Editor’s Note: We don’t actually call him that Suz)
Ready to conjure up your margins? Grab a cup of coffee; this is going to be a journey.
YOUR OVERHEAD IS KEY
The first thing you need to do is get your financial statements together. At least three months’ worth; more if you have them. By looking them over, you can determine your average monthly overhead. That gives you the all-important number to work from.
Irvin acknowledges that this is hard to do if you’re a newer shop or even just starting out. “You’ll need to do some estimating,” he says.
Your overhead is a key number in this. Those are your regular expenses that are not entirely related to the actual repairs you do. Stuff like your rent or mortgage, your electric bill, insurance, the coffee you keep restocking the break room with…and so on.
But your overhead isn’t the only number. You’ll also take a close look at your labor rate, your parts, and sublet activities.
(We’ll talk a bit more about these three items in a moment, but subletting is when your shop essentially acts as a middleman—if you bring in a company to do axle repair, for example. The company coming in will be on your property, so you have liability and expenses associated with that repair. And frankly, if you’re handling the monetary portion of things, shouldn’t you get your portion?)
So. You’ve got your numbers. Add them up for multiple months. When you know what you spend in a month—again, on average—you’ll know you need to pull in more than that number to keep the lights on and (hopefully) turn a profit.
BUT HOW DO I SET MY NUMBER?
“If you don’t have much gross margin above what your overhead is, you don’t have much net margin,” Irvin tells us. “If your net is too small and you have a slow week, or a job that goes bad, next week you’re paying for the privilege of working on vehicles. It’s not sustainable.”
Irvin, like others, wasn’t keen on giving us one magic number that will work for all shops. “You need to stay within what’s fair with your market,” he advises. “Your overhead expenses may be less than what your market would typically bear and you may need to take into account what additional overhead would be as you grow.”
Wait, you have to look into the past and the future?
(We did say this would be a journey.)
You don’t need to steal your neighbor’s DeLorean to see how your shop will be faring next year or five years from now. But think about what you can expect from your shop in the foreseeable future (if you have some goals laid out, this task gets way easier). Just because you don’t have additional overhead right now doesn’t mean that you won’t in six months.
Let’s say you look ahead and realize you’ll have to add a new service advisor by the end of the year. When you do that, you should be able to bring in a certain number of additional sales. So you’ll want to raise your overhead to include the payroll associated with that new service manager.
Your margin number is somewhere in there.
LEVERS TO PULL
In short, you need to move your margins into a position where your sales numbers and your overhead will line up.
Let’s return to labor rates and parts pricing. To borrow a phrase from Co-Founder and Executive Chairman Jacob Findlay, these are three levers you can pull (or buckets you can fill) to make sure you’re meeting and exceeding your overhead.
We’ll make up some easy numbers. Let’s say your overhead is $100, because you are apparently operating in 1890. How do you make sure you’re making enough money to exceed that $100? Let’s say, again for simplicity, that you decide on a 15% margin to meet your obligations and make a small profit.
Maybe you’ll spread that margin across the three items—5% on all buckets. Or maybe you’re putting 7% on labor and 8% on parts.
If you need a little help determining what margin you have on labor, Irvin advises taking your total number of invoiced hours for the last three months. Take your overhead (including technician labor rate) for those three months and divide them by your sold hours. “You’re probably gonna cry,” he says, sharing a story of one shop that realized its cost to invoice an hour of labor was about $20 more than its labor rate.
(If you are one of those shop owners who starts crying, we’ve got a post full of advice to help you raise your rates!)
Parts can be a more complicated beast. You need to set appropriate margins for your parts (a parts matrix is useful there), and these days, that often means being flexible and revisiting costs frequently (a part may be plentiful and affordable one week, then nearly impossible to get the next).
Even now, many shops don’t think beyond, “Oh, it costs this much, so I’ll slap a markup on it and be done.” Irvin stresses that all owners need to think more about the actual cost of putting and keeping a part on the shelf and adjusting pricing from there.
We’ll discuss this in more detail in the next section.
So, if margin is so useful, why isn’t everyone using it?
The first is that some shops are simply too disorganized to implement it. They may be bringing in plenty of revenue, but implementing a structure is too big of an ask.
The second is the owner themselves. Many owners started out as technicians and saw plenty that they didn’t like in their previous places of employment—they might have perceived charging high rates as gouging customers, for example. “They go in the opposite direction,” Irvin says, because they don’t fully understand what goes into overhead. They charge what they think is fair, but fair doesn’t always cover your rent.
Irvin also sees shops that don’t manage their parts margins separately for things they’re buying at wholesale price vs. what they’re bringing in at retail price.
This is a big deal.
If you buy a part for $100 and you have a 10% margin on that part, you sell it for $111. But let’s say you got a really awesome deal on that same part and paid $50 for it. If you keep that 10% margin, you’re selling it for $55. You made $5 instead of $11. Yes, your customer got “a screaming deal,” as Irvin puts it, but you inventoried it, you took the risk of losing it, you paid for the labor to bring it in and stored it…a lot of work goes into stocking that one part.
Also, screaming deal is our new favorite phrase.
(Editor’s Note: I had to delete five more mentions of “screaming deal.” THANKS IRVIN.)
FULLBAY AND MARGINS
Since flexibility around parts pricing is a big part of setting (and maintaining) a correct margin, we thought we’d drop a little plug in here for Fullbay. Irvin likes the price level feature, which lets you automatically set the prices you’ll charge for parts for each customer. The price level will let you have pre-created price matrices and margins set up and pre-priced, then you can just choose that price level. BAM, you’re done!
It’s pretty neat. And once it’s set, it’s set.
Irvin likes that it gives him back some time. “Running a shop is a big deal,” he says. “It takes a lot out of you. There’s a lot you have to know—or you need a team that knows it.”
It doesn’t hurt to have an app to take on some of that burden, either. Curious about your margins? Want to see what Fullbay can do for them, and for you? Schedule a free walkthrough right here—we think you’ll be impressed!