STOP! Think before buying that next piece of equipment
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I was recently coaching a shop owner who was clearly agitated at the beginning of our meeting. His issue stemmed from a Porsche in the shop with an oil leak that required the removal and disassembly of the engine to remedy the leak.
“What’s the issue with that?” I asked. “Getting the engine out and apart was easy,” he said. “When we were putting it together, we ran into a snag and realized we needed a specialty tool to properly reassemble the engine,” he lamented. “OK, and?” I said hesitatingly. “The tool costs $500 more than we’re making on the job!”
I dug deeper, asking, “How many of these jobs will you do this year?” “None. We don’t see these vehicles often.”
Yikes!
Or how about the time yours truly spent more than $50,000 for test equipment to properly diagnose EEC-III computer systems and used it four times after purchasing the equipment? (Yes, you read that right, and it still stings when I share this story.)
Way too many technicians judge their capability as a tech by their ability to fix whatever comes in the door. As a rule, we just hate saying, “No.” But there are times we should DEFINITELY pass on the work. If the work is outside of what you normally do, and you’re not looking to expand into that area, you should decline the job because you won’t do enough jobs to warrant a return on your investment. If there isn’t enough of that kind of work to be sustainable, once again, you should decline the job, because there isn’t enough traffic to justify the purchase.
To maximize profitability, it’s imperative that you stay focused on the work you do well and avoid the need to commit to work outside of your expertise.
Because equipment is becoming more and more specialized, if you’re going to invest in equipment, you must make sure that you get a proper return on your investment. Today, it isn’t enough to buy equipment just to do the work. Purchasing a piece of equipment should net you a profit plus cover your investment.
Research your potential
If you’re looking to expand the type of services you currently offer, do the research to find out what your potential is to see if it’s worth doing. If you’ve never done this particular job before, have your techs review the R & R process and research whether there are special tools you’ll need to complete the repair or service. It’s better to find this out before you give your client a price for the work and end up like the first shop example I shared at the beginning of this article.
For an equipment purchase to make sense, it needs to meet one of two criteria: it should either increase car count because of the addition of a new or better service, and/or you should be able to charge more or save time (while still charging appropriately) because of the equipment.
Because very few shops offer any kind of ADAS recalibration service, adding this to your offerings is one way to increase your car count. Charging a hookup fee for specialized equipment is an example of charging more for a service.
The best way to take out of the mix your desire to fix anything, no matter what, and make an informed decision regarding the purchase of equipment is to figure out your return on investment. To calculate the return on investment from a piece of equipment, subtract any labor, parts, or overhead costs, such as repairs and updates the equipment will need monthly from the price you’re going to charge for the service. That gives you the net profit per service. Now speculate the number of services you’ll perform per month. Multiply the net profit per service by the number of anticipated services you’ll perform, and you’ll see what your monthly profit will be. Multiply that amount by 12, and you’ll see how much gross profit you’ll generate annually with the equipment.
Now, calculate the expected life of the unit in years and multiply it by the annual profit calculated above. This gives you the profit potential of the equipment. Subtract the cost of the equipment from the profit and you’ll see the return for that equipment.
This is a great way to make sure you’re charging enough and provides you a ruler to measure how many services you’re performing versus what you anticipated. Running this calculation, you may find that you need to increase the price you charge for the service to be profitable and/or you’ll work hard to get the number of services up to the number you expected.
With a $99.95 price point, it’s going to take 50 months before you break even with this service. Notice the breakeven date of 33 months before generating a profit in our second example. Understanding the different factors involved with equipment allows you to maximize profits while providing a great service for your clients.
If you’re purchasing a new scan tool and are thinking of ways to recoup the cost of the equipment, the following calculator is designed to help you determine what you should charge for the new scan tool you’ve purchased. I believe the days of you “eating” the purchase of the equipment to perform the work just doesn’t work anymore.
First, calculate your total investment by adding up the purchase price and any updates or services the equipment will need over the life of the equipment. Now, calculate the expected life of the unit in years and divide your total investment by the expected life of the equipment, which gives you the annual cost of the unit. The easiest way to get this information is to talk to your equipment salesperson, the manufacturer, and/or by asking in an online shop owners’ group. Divide the annual cost by the number of times you anticipate using the equipment per year, and you’ll come up with your cost per service. Multiply your cost per service by your profit factor of 100%, as an example, (If you’re making an investment in equipment, shouldn’t you make a profit on that investment?) and you’ll determine what you should be charging every time you use the equipment. Personally, I think this is a fairer way to charge for the service, versus raising your labor across the board.
Running either one of these scenario calculations on a desired piece of equipment takes your ego out of the mix, which allows you to make a sound business decision. If you run either of these calculations and you don’t feel you can recoup the cost of the equipment, you’re better off declining to perform the service or repair because it doesn’t make sense to do it. Making this a practice will keep you and your business in the black.
If you’d like to take advantage of the Excel spreadsheets I shared in my examples to make it easier for you to calculate the return on investment on a future potential purchase and/or how to calculate what you should charge for a piece of equipment, simply go to www.180biz.com/roi (lowercase) and get yours today!
