The Increasing Costs of Doing Business

Labor prices. Quality equipment and materials. Insurance. It seems that many aspects of business are becoming more and more expensive. The question for shop owners and managers is how to compensate for rising costs without compromising the value and quality of their services. Raising prices is one obvious response to increased costs, but not always the preferred solution in today's competitive marketplace. Many shop owners are looking for new strategies to avoid lost profits resulting from the increasing costs of doing business.

Don Seyfer of Seyfer Automotive in Wheat Ridge, Colo. has seen the biggest price increase in labor rates, benefits packages for employees and insurance. To keep his profits up, Seyfer has had to take different approaches. He says that raising prices is one way to deal with rising costs, but also realizes the danger of relying on increased rates. "We've raised our prices some," says Seyfer, "but we also have to stay competitive with the larger, multi-faceted shops."

Another technique that Seyfer employs is what he calls "tiered" labor pricing. For each job, the cost of labor time is relative to the complexity of the work. The more skilled and involved a job is, the higher the hourly labor rate.

Juel Clevenger of Delta Diagnostic and Repair, Inc. in Lees Summit, Mo., cites increased labor prices as his largest business expense increase. He attributes this increase to the diminishing supply of qualified technicians. "To keep good technicians, you have to offer competitive wages and benefits," says Clevenger. "It's becoming more and more expensive to keep quality employees."

In response to higher costs, Clevenger has slightly raised his shop rates, but also finds other ways to increase revenue. One goal is to decrease the quantity of jobs that come into the shop, and focus their efforts on doing more thorough work on the cars that do come in. Clevenger hopes to do this by educating his customers about preventative maintenance.

As a collision shop owner, Larry Stafford of Rivercity Collision Service in Austin, Texas feels he has less control dealing with increased expenses due to prices set by insurance companies. The insurance companies cover some costs such as increased part prices, but do not allow for other, less visible expenses. Those expenses, for Stafford, are the cost of materials, labor, equipment and insurance. Because of expenses like these, profits have decreased for many shops.

Some shops, however, are taking steps to change that. One shop owner who asked not to be identified, said of this issue, "A few shops have done what most of us should have, and increased labor and materials independently of what the insurance companies were willing to pay, but most of us have held the line for the past four years. This year has seen more shops step out, mine included, and increase labor and material."

Stafford looks for other ways to make up for high costs. One way is to control his shop's expenses. "I try to do with fewer people in the office, shop for insurance annually, and make sure we're not wasting any materials." In addition, Stafford says it is important that he and his staff are diligent when appraising a vehicle so that everything that needs to be done is identified. In response to high labor costs, he monitors the efficiency of his employees.

Jay Wegmann, CPA, of Wegmann, Dazet, CPAs in New Orleans, agrees that to control increasing costs, it is important to spend time evaluating your expenses. "Being an accountant, the first thing I do about increased costs is measure what is costing me the most," says Wegmann. "For increased labor time, determine the billable hours per technician, and find out if there are areas where efficiency could be improved." Wegmann suggests that spending time motivating, training and supervising your employees will help to decrease costs of labor. He also emphasizes the importance of scheduling the right technician for each job. Having employees working on the projects that best suit their skills will aid in efficiency and result in lower costs.

Wegmann also recommends offering good incentive plans to keep quality employees. These plans could include sick time, paid vacation and holiday time. Fringe benefits are very appealing to employees and sometimes can be less expensive to the employer than simply paying higher wages.

Bob Cooper of Elite Business Services in San Diego realizes that raising prices to compensate for increased business costs isn't always the best alternative. He suggests that there are other ways to keep your profits high. Although high labor prices are an issue for most shop owners, Cooper feels that hiring quality people is worth the extra money it costs to get them. "The costs of hiring the wrong people can be very significant. Having the right people will help you increase productivity and keep costs down in the overall picture," says Cooper.

Another way to counteract high costs, suggests Cooper, is to develop programs to keep your customers coming back. One way to do this would be to offer longer warranties on parts and service. "People don't want to pay for parts, they want to pay for peace of mind," says Cooper. "They'll pay more for a guarantee and it also ensures that they'll come back to you if there is a problem."

According to Cooper, lifetime oil programs are an excellent way to keep customers coming back. His program involves charging one flat price for oil changes for the lifetime of a car. That way, says Cooper, you'll keep customers away from chain lube centers and have a chance to inspect their car periodically for other problems.

Similarly, your current customer base can be your most valuable resource. Larry Edwards of Edwards and Associates Consulting in Charlotte, N.C., also feels that you can increase your profits by providing more services to each of your customers. "Look at how many one-item orders come into your shop," says Edwards. "That's the best place to look for additional revenue opportunities."

There are options to help compensate for the higher prices shop owners are dealing with today. The most important thing is for each person to determine the best options for his or her individual shop. Edwards says that making money in business is a three-part equation that includes sales, gross profit and expenses. He says you can adjust one of those factors to improve your profits. "It might benefit your shop to lower prices to increase sales, increase prices to increase gross profit, or take steps to reduce expenses and fixed costs." The factors are different for each shop, but each are effective means to help continue making a profit in today's increasingly expensive marketplace.