Every time we visit a workshop, one thing that comes to our mind is whether they are charging the right amount of money or if they are taking high margins.
This is also a question of many people interested in cars and want to turn their passion into a business by opening an auto workshop.
If you want to ensure that you are paying the right amounts to get your car repaired or are planning to run a business, then this is where you can learn all.
How is Profit Calculated?
First, let’s learn some basics of finances and how the net profit is calculated.
Generally speaking, profit is the total revenue a business generates minus its total expenses.
To understand it with an example, let’s say that an auto repair shop in Houston provides services and products for $700,000 annually. The total expenses to operate the workshop are $500,000. These expenses include rent, labor, advertising, licenses, and more.
So, the net income of that workshop is $200,000.
On the other hand, we have a profit margin, which is the measurement of a company’s profitability. It means how much a company keeps earning from every dollar of sales it generates.
The profit margin is measured in percentages and determined by dividing the net profit by the total sales. In the previous case, the net profit of the auto repair shop was 20%.
Understanding the concept of profit margin is important because, in most cases, increased revenue doesn’t always lead to increased profitability.
How the Auto Repair Shops Usually Make Money?
There are a number of ways the auto repair shop can make money or maximize their income streams. Let’s discuss some of the common methods they currently use:
1) Selling Spare Parts
Almost every car that comes at an auto workshop needs some spare parts. The bigger auto repair shops have a range of spare parts, including automotive lighting, wheels and tires, engine parts, exterior modifications, and much more.
However, some auto repair shops rely on specific niches of spare parts and only sell those. They purchase these parts in bulk from wholesalers, which costs them less.
They can sell these parts at about 20-25% profit margin easily.
2) Saving Money from Labour
The laborers don’t get the full amount of money for their effort. A significant cut of the labor charges goes to the workshop owner.
Workshops have a predetermined charge based on hours. The laborers only get their charges on an hourly basis, and it doesn’t depend on the type of services they are performing or how much the workshop charges from the customer.
Generally, the profit from laborers is about 40-55%. It’s one of the best ways auto-repair shop owners make money.
3) Fee for Diagnostics of a Problem
Most beginner drivers can’t understand what the problem is with their car. They might hear some unusual voices. Or experience something off while driving, but they usually don’t get the underlying issue.
That’s where workshops come into play; they charge some amount for diagnosing the issue, which eventually leads to fixing it and making money.
The profit margin is very high for diagnosing issues because, most of the time, the underlying problem is interpreted by the ECU unit.
4) Emergency Recovery Services
It’s common for cars to stop running on the road or get into an accident, after which the vehicle is unable to drive.
This is also an opportunity for the auto repair shops to make money. They provide recovery services in which a towing truck is sent to take the car to the workshop or drop it at the owner’s home.
If the workshop owns a truck, then the profit margins are high, but if they have to rent it from a towing company, then the profits can be reduced.
The cost of recovery depends on the type of vehicle; it can cost somewhere between $100 to $200 per hour. Considering the rent of a towing truck, drivers per hour rate, and gas, the margin on recovery services is less.
However, if the car is shifted to the workshop, it creates an opportunity to earn money in the long run.
How Auto Repair Shops Boost Their Profit Margin?
The most effective way to boost sales and profit margin for an auto repair shop is by maintaining customer loyalty. If a customer is fully satisfied with the services of a workshop, they will only prefer to visit there if they have any problems in the future.
Moreover, they will also recommend their family and friends to visit that workshop, which is eventually beneficial for boosting their sales. When more customers walk through the door to get their vehicles repaired, the more profit a workshop will make.
How an automotive workshop is managed also plays an important role in boosting sales.