When Business Slows, Don’t Give All Your Profits Away
By Michael Green
"Where did all the business go after the tragedy of Sept. 11?" is something that a lot of small business owners were asking themselves. In our shop, we noticed a decline in business, and when I talked to other business owners in fields unrelated to the automotive industry, they say that they have experienced a decline in their sales also.
Although in many areas of the country shops and their suppliers are reporting a noticeable uptick in business over the past several weeks, I guess that since the U.S. economy had already begun heading south prior to Sept. 11, sooner or later we would probably have seen the slowdown we experienced anyway. It must be paying the dues for having such a good economy for so many years. I had forgotten just how tough it was to make ends meet during economic slowdowns and how long the days really are when we don’t have a lot of work to do.
Accounts that we work for who were slow had been complaining about their customers not wanting to spend the necessary money to repair their vehicles properly. The customers were requesting that the shops do minimal work, anything to make their cars run a little longer.
Because of this wishy-washy customer attitude, once the customer has agreed to do the work properly, some of the repair shops were/are immediately taking these vehicles apart just in case the customer should call back in a couple of hours because they have changed their minds. Once these cars are apart, there is not a lot of choice for the customer if they should choose to delay the work. These are the same repair shops that in the past had so much work that they were actually turning customers away.
In the past, what I have seen happen in the machine shop business when the economy slows down is that pricing for labor goes right out the window. Shops start competing with each other for work, and some shop owners feel the only way to get the work in their door is to do it for less.
Now I fully understand that without work you don’t have the money to pay your bills or support your employees. But, what I don’t understand is why some shops drop their prices so low that they give away all their profit.
Once this price cutting cycle starts, to stay competitive other shops are forced to do the same and before long, shops are swapping dollars instead of making a profit. I have always complained that the investment a machine shop owner has to make for the return on his investment compared to other types of business is way too low.
It’s our own fault. We as a group have control over this situation. The first thing is to not panic over a downturn in business. Stick to your pricing; don’t give your knowledge and the use of your equipment away for a loss to do the job. Tighten your belt and work on cutting your overhead. Do some advertising and go out and call on your accounts and, of course, continue to generate new accounts, too. Work a little harder at the business side of your shop, and you should get through economic downturns without having to cut your prices.
Through the years, I have been forced to cut my prices during a recession, and as the economy starts to get better, trying to raise them as fast as I dropped them is almost impossible. Your customers and competition will not allow it. I think this is one of the reasons that the automotive machine shop industry has had such a rough time surviving and why it seems this industry is always behind in its pricing as compared to other similar types of businesses.
Another reason why prices fall in slow times is the constant beating you get from the repair shops on prices. I know that everyone in the machine shop business has at one time or another heard the repair shops say that your prices are too high, and they want you to sharpen your pencil if you want the work.
In some cases, I have actually had the customer come to us after a repair shop has done a job, complaining about something just to find out we did not do the work. The repair shop told the customer prior to doing the repairs that our shop was the one that would be doing their machine work. The repair shop charged our quotes but then found another shop that would do the work for less. Naturally, the repair shop makes a lot more profit by doing this. And we are not alone in this situation: we hear they often do the same things to auto parts stores.
From time to time, repair shop customers will show up at our front door with a problem, and when I see the repair bill, I just about die looking at the prices they were charged. In some cases, the repair shop makes a profit of over 100 percent on materials, parts and sublet labor.
They sometimes make more profit on these items than they do on their own labor. These shops charge an hourly flat rate (like most machine shops should do) and then cut the flat rate time in doing the job and still charge flat rate book hours to the customer.
Now don’t get me wrong, these repair shops are my bread and butter – they support the aftermarket. And, if you think you have it tough, think about the mechanics who not only have to know how to work on the engine but also everything else between the bumpers on a car.
On occasion, I have been asked by a good account to give him a break on a price because he was slow and needed the job. As long as these accounts don’t make a habit of doing this, I will generally cut them a break. Sometimes, we will also have a good account that will screw something up, like drop a bolt down the carburetor or something like that, and will ask for help as far as pricing goes. But, what goes around, comes around. And, if down the road we have a problem on a job or if we are a little slow, I expect a favor to be returned by a repair shop that we may have helped out. In most cases, they do step up and take care of us.
Over the years, we have worked very hard at the business relationships with our major accounts and, like all relationships, you have the highs and lows. Most of the time when I’ve had a falling out with an account, it has not been because of the quality of the workmanship but rather we may not have met the time line for delivery back to their shop. Or maybe our prices are too high compared to our competition.
When we have not made the delivery time, it is mainly due to a sudden surge of business, and the accounts are all yelling at the same time for their work. It is during these sudden surges that by the end of the day, I don’t have much butt left because its been chewed on not only by the customer but also by my employees because I promised a quick turnaround time to the customer.
Our shop is set up for a quick turnaround on many types of jobs, but occasionally we do get overwhelmed and can’t meet all the deadlines. After this happens a couple of times to the same vehicle service garage, they begin looking around for another machine shop that can deliver according to their time schedule. Sometimes these customers do end up coming back to us because we were not as bad as they thought.
Our pricing is based somewhat on the length of time it takes us to complete a particular job. Over the years, I have tracked the man-hours on all the different jobs we do, and then I have set a per job base price. I did this because too many times when I have set a price for a job, we would sometimes end up spending twice the man-hours on it than we should have. It resulted in us working for half the hourly rate that we wanted to make.
We still have machine shops in our market that are behind the times on their pricing. Occasionally, our accounts will call around to other shops to make sure that our pricing is somewhat in line. This seems to happen more often during a slow period.
When questioned about our higher prices, my response generally is, "In order to give your company the quality and service that it deserves, these are the prices we have to charge."
This doesn’t always work. But again, if we lose an account over pricing, it is normally because they are the type of account that bargain hunts to begin with and never quits complaining about our prices. They are the accounts that always pressure you for a quick turnaround and complain the loudest when something goes wrong.
A friend of mine who owns a machine shop across town made a comment to me years ago, and I have never forgotten it. He said, "If I am going to go broke, I’m going to do it sitting on my butt, not working my butt off." Thanks Joe for those words of wisdom!