However, successfully running an auto repair shop and making it profitable doesn’t come that easy.
In fact, the automotive repair industry has seen a steady increase in competition recently. Auto repair shops are springing up across every town which means that there the marathon to ensure shop’s profit margins is harder than ever.
So how profitable are auto repair shops really? What factors should auto repair shop owners consider to boost their profit margin?
In this post, we are going to discuss the top six factors that affect the profit margins of auto repair shops. As auto shop owners, you can explore these factors and tactics to improve the financial performance of your auto repair shop.
What is Profit Margin and How is it Calculated For An Auto Repair Shop?
The auto repair industry is a $63 billion industry but the real question is what are profit margins? How is the profit margin of an auto repair shop calculated?
These questions are important things that auto shop owners should think about while opening or expanding their auto repair shop.
Simply put, the profit margin is the percentage of sales or revenue for your auto repair shop that are profitable.
There are two types of profit margin, the gross profit margin, and the net profit margin. Usually, it is recommended to go with the net profit margin while analyzing the performance of your auto repair shop.
The net profit margin is calculated after deducting all the expenses of auto repair shops or any business, for that matter. This is how you measure profit margin.
Net profit margin is net profit divided by revenue, times 100. The net profit is calculated by deducting all of the expenses from the revenue of an auto repair shop.
Why Is It Important To Calculate Profit Margins?
We’ll be honest: not many auto repair shops calculate their profit margins when they’re determining their performance or making important business decisions.
Most of them are just too busy getting the cars of their customers fixed and don’t really give it much thought.
But if you’re considering signing a new service contract or taking any important business decisions, calculating profit margins should be one of the first things you do.
In the long run, profit margins are extremely important for auto repair shops. It can be difficult to measure profitability because auto repairs are typically recurring monthly expenses. Additionally, most customers who need auto repair services tend to be loyal to a specific shop.
However, there are ways to measure the profitability of an auto repair shop even if they don’t receive much repeat business.
For example, you can calculate how much a shop spends on advertising and promotional items and compare that to its profit margin. This type of analysis can help shop owners understand how much they’re spending on their marketing efforts and whether it’s actually working.
It can help the business owners in understanding which business tactics and strategies are actually resulting in a higher profit margin for the auto repair shop.
The Top 6 Factors That Enhance The Profitability of Auto Repair Shops
If you want to take your auto repair business to the next level, as a shop owner, you should explore these six factors and fine-tune your business strategy accordingly.
1. Labor Costs
One of the most important expenses for the auto repair shop is of labor. Labor is one of the most important pillars of successfully running an auto repair business.
The more qualified and experienced your team is, the better will be the customer experience of the auto body shop. Attracting good talent requires you to pay higher wages at your auto repair shop.
So while that might mean higher costs, it will also encourage repeat business through excellent customer service.
Usually, owners of a car repair shop are easily tempted to higher fresh and inexperienced talent to drive down operating costs. However, this is only a temporary way to increase auto repair shop profit.
In fact, this can drive down auto repair shop profit in the long run because you will have to invest more money in training talent at your auto body shop.
Let’s suppose there is an auto repair shop offering customers exemplary service. But the example auto repair shop also charges its customers higher prices due to an experienced and qualified team of professionals.
In this case, this shop can have a higher profit margin because, despite high labor costs, they will also be getting more customers because of excellent service quality.
2. Effective Scheduling and Planning
As a shop owner, you can invest in the best possible team for your auto repair shop, but without effective planning, it won’t do you any good.
In fact, in the auto repair business, it is very important that schedule and plan your team’s repair activities effectively.
It is possible to keep labor costs in check by having customers schedule appointments so that you can anticipate how many employees you will need and when. You also won’t have to deal with no-shows when you use reminder calls or texts.
An effective way to automate scheduling and planning is through auto repair shop software. As a business owner, you must be wondering why this requires quite the initial investment.
However, having software for scheduling and tracking employee productivity can help you analyze how profitable your workforce is. It can also remind customers of scheduled appointments through automated emails and text messages.
Sometimes, you can also use such shop software to bill customers automatically and generate invoices. By automating day-to-day tasks, you can decrease the amount of time spent on a customer which also makes customers happy.
3. Capital Expenses
Your profitability also depends on your major capital expenditures, such as rent or mortgage payments, equipment purchases, and more. It’s important to have a good location for auto repair shops.
One of the key factors that determine how much total sales revenue you are going to make is in fact, the location of your business.
Moreover, if you rent your location, you might be able to save money upfront, instead of tying up a large portion of your equity in a down payment and a commercial mortgage. Rent spikes can hurt your bottom line, and owning your property protects you from that.
You need to purchase equipment and keep that equipment in good working order. This is another key expense that affects your store’s profit margin.
If you want to give your customers a quality repair job, you need current, reliable machinery. It is possible to spread out the cost of important equipment over time with equipment financing.
All of these costs will have to be considered as you measure the profit margin for your auto repair business.
4. Day-to-Day Expenses
Keeping an eye on your everyday expenses can help protect your profit margin. If you don’t know it, you may be overcharged for responsible chemical and oil disposal. It is also advisable to conduct research to ensure that you are charging enough for your services.
It is also recommended that you look into the average industry cost for labor, for example, make sure you research hourly wages from time to time as these figures tend to change.
You should calculate the daily expenses incurred per average repair order. You can also compare this to the average expense per repair order in the industry, to analyze your performance.
Credit card transaction fees can cut into your profit margins if you do not watch out. It is possible to find the best rates based on your sales and average order ticket.
Some processing companies charge the same flat fee for credit and debit cards, while others have different rates. It’s a good idea to get quotes from your banks, insurance agents and accounts every year.
5. Marketing
Getting new customers or establishing a loyal customer base for your auto body shop will require you to invest money in marketing.
It is an investment that can build and maintain your customer base, so honing your marketing strategy is an important part of your business plan. Car owners have to pay nearly 9 cents per mile for maintenance and repairs.
According to the Federal Highway Administration, each customer you attract and retain could generate more than $1,200 in business every year, because the average driver puts nearly 13,500 miles on their car every year.
Every business has a responsibility to create a digital and social presence to attract new customers.
According to Bright Local, ninety percent of customers find local businesses and services online, so make it easy for prospective customers to find you. There is a way to create a listing for your business on the internet. Make sure that you have a website that is search engine friendly.
You can also invest in the latest marketing tactics like search engine optimization that has the potential to boost total sales generated.
Most customers search the city name along with the service they want, so sprinkle applicable keywords and phrases, such as “Denver oil change” or ” Chicago tire repair” throughout your website content.
6. Focus on Customer Service and Get Positive Reviews
Bright Local says that eighty-two percent of customers read online reviews before making a purchase. It is important that you add your business to review sites and maintain control of the conversation even if you might be worried about opening yourself up to criticism.
Customers will research your auto repair shop online before buying your vehicle. It is important that you establish your business as a credible and trustworthy provider because horror stories about dishonest mechanics overcharging or making unnecessary repairs can affect your profit margin.
Negative reviews can occur. If you can address the customer’s concerns in a positive way, you can give them insight into how you handle problems and criticism. If you address the negative review, you could turn an unhappy customer into someone who would return to your shop.
Additional Tips To Boost Profitability
While factors like inexpensive and inexperienced help, labor costs, capital expenses, and marketing are important, there are also other ways that can improve profitability.
With a few small changes, you can see improvements in the bottom line in no time. For example, if your customer base is younger in age than average, why not increase the average age of your clientele by offering discounts for people over fifty or sixty?
If there’s only one mechanic in your town, maybe you should offer your services to those who live further away. Maybe you can take on more clients by advertising at local community centers, high schools, and senior centers.
In the past, auto mechanics charged a flat rate for repairs, but with technology changing, most mechanics charge per hour of labor. In addition to changing the way mechanics get paid, businesses should take a closer look at their pricing structure, according to the latest research.
According to the study, which surveyed a large number of consumers, the price was a huge factor in purchasing decisions, and customers expect a better deal if the business offers an estimate upfront rather than waiting until the final cost is revealed.
Wrapping it Up
In conclusion, in addition to maintaining a strong, profitable business, repair shops must also offer high-quality service at affordable prices and maintain the reputation of being a leader in their industry.
As a shop owner, you will also have to invest in a highly qualified and experienced team.
Always remember that offering quality services to customers will help you draw in leads. If you pair up excellent quality services with targeted marketing efforts and maintain a good team, you can improve the financial performance of your company.
If you can do all of these things, you’ll reap the rewards of a highly profitable auto repair shop.
