Final Wrap: Crystal Balls, Darts And Other Ways Not To Set Rates
By Doug Kaufman
I never jumped off a bridge when I was a kid. None of my friends did, either, come to think of it, but that never stopped my dear mother from cautioning me against it.
I'm sure your mother said basically the same thing. No matter what you wanted to do because someone else told you to - whether it was rollerskating down the biggest hill in town, drinking as much cola as possible just to see how big a burp you could make, or hitting the wasp nest with a broom stick - Mom would throw in that famous line: "If they all jumped off a bridge, would you do it too?"
Of course, she usually was right, and she knew that we would be better off heeding her advice. She was definitely thinking of our best interest.
Sadly, many engine builders seem to have forgotten their mothers' words. At least, that's the impression I got after reading some of the comments from respondents to our recent "Salary and Benefits" survey.
Believe me, I'm grateful to all the busy shop owners who took the time to respond to our questionnaires, whether on-line or by returning a fax. I appreciate how busy you are and recognize that this took time from your busy day.
But to see a number of people respond to the open-ended question "Please write in how you determine your hourly shop rate" with "I charge what the market will bear," is, well, akin to jumping off a bridge because someone told you to.
For years, you've been reading in these pages about the need to "know your numbers," to have the necessary detail of your actual costs to be able to set your costs to produce a satisfactory profit. Business leaders, association executives, technical professionals and others say that the resources are available to allow machine shop owners and engine builders to understand the details of their daily operations.
Yet, the answer to the question often continues to be, "What I thought was fair for my market."
I got an email from Earl Comer, Comer and Culp Engines and Performance, in Sydney, OH, the other day. "Over the years, I have watched a lot of machine shops go out of business or bankrupt," writes Earl. "(As an industry) we know that the prices we charge have not even kept pace with inflation. In 1974, I was charging $60 for a V8 valve job. If I do nothing but add the rate of inflation to that price, I get $260. That doesn't take into account the fact that I used to grind seats with a $2,500 grinder and today it takes a $40,000 seat and guide machine."
A few months back, we published a letter from a shop owner who suggested that shops need to have a flat-rate guide of some sort to better support their hourly rates. "Rather than going by pricing that was determined in the 1950s or 1960s, this industry needs to know how long it actually takes to do a job and price it accordingly."
Earl Comer agrees. "Two years ago, I looked up what the labor rate was for grinding the valves on a 350 Chevy pickup. The rate was for 16 hours. I subtracted R&R heads for this job and came up with 6 hours to grind the valves. So my local dealer who charges $70 per hour is charging his customer $420 for a job that I charge him $150 for - and he complains that it's too high. Who's the fool here? Yes, we need a flat rate manual. It doesn't mean you have to charge that but then again you have a way to justify what you do charge."
Another interested reader, Doug Barbour, from Rockville, MD, suggests that a flat rate manual only solves part of the problem. "My difficulty in pricing jobs stems from the reality that different employees spend differing amounts of time to do the same job. I have priced jobs according to how long it takes ME to do the job but then realized that it actually takes my employees 30 percent longer to do the same job. If I am motivated to price the job according to how long it takes the slower employee to complete the job, it does nothing to encourage efficiency, and is unfair to the customer. Usually, I settle for somewhere in between."
The discussion about flat rate manuals is a great one and I urge you to voice your opinion. But it doesn't get to the basic point of my column this month - no matter how you choose to price your jobs, whether per job, per hour or by some other method, if you're setting your rates based on some number you "think" makes sense, you're doing little more than throwing darts in the dark.
Your business is unique and basing your prices on what you think someone else would charge is probably not the best solution. If they told you to work for free, would you?
Comments? Contact me at email@example.com.