One of the most common questions we are asked is "How do I determine my labor rate?" For most dealerships, the process of setting a labor rate begins with calling all the competitors in the market, asking them what their labor rate is and then making sure that they are somewhere close to the competitors.

In our company, we jokingly refer to this method as “pooling ignorance.” Why, you might ask, is this not a good method? Well, most of your competitors do the same thing to set their labor rate and ultimately it has nothing to do with the market. It’s just a group of dealers who are in a race to lose money in their service departments.

So how should you set your labor rate? We recommend several methods. If you want to do it the simple way, call your local car dealership and find out where they are. In most cases, you will find that their labor rate is right for the market. They don’t call other car dealerships. They have worked with the manufacturer to determine where they need to be in their market to be profitable when considering the cost of techs, the physical service department, the training, and tools their techs need to perform quality work.

If a dealer wants to use this method, we recommend being no more than 10% below their local car or truck dealers. If you don’t have a local car or truck dealer in your community, then go back and do some basic math.

Your first question is, “How much will it cost me to get a good technician?” Many of you may think, “It’s impossible to find good technicians in my area.” I would disagree and say, “It’s hard to find good, inexpensive technicians in any area today.” It’s not that they are not there; they are just not cheap.

Best Practices with Bob Clements is a series brought to you by Yanmar.

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If you are paying $20 per hour and losing technicians, then $20 is not working. It might need to be $25, $30 or even $40 per hour. It doesn’t matter the number, because it has nothing to do with you and everything to do with your market and the expertise you are looking for.

We know that in our system for service departments, we can pay a tech that is billing 8 hours in an 8-hour day, 30% of our posted labor rate. So, if I need to pay a tech $30 per hour to find and keep one, I know that my labor rate is going to have to be at $90 per hour. If I can get a tech for $25 per hour then I would need to have a labor rate of around $85 per hour. This makes my service department profitable for the dealership.