By Hunt Demarest, CPA, Host of Business by the Numbers Podcast
The most common question I hear from shop owners: “Is my labor rate high enough?”
It’s a fair question—but it might also be the wrong one. The real issue is usually deeper, and if you’re serious about boosting profitability, you’ll want to stick with me. Because labor rate? That’s just the surface.
Why Labor Rates Aren’t Like Parts Pricing
Labor rates are unique. Unlike parts—where your margin is built directly off cost—labor pricing varies wildly. I’ve got clients charging $330 an hour and others just shy of $100. Same industry, different realities. And no, the $330 shop isn’t in Beverly Hills—they’re in Texas.
Labor rates are influenced by location, business model, and how you operate. But here’s the kicker: your labor rate has no consistent correlation to profit. We’ve analyzed data from hundreds of shops, and the high-charging shops aren’t always the most profitable. Same goes the other way—some shops with lower labor rates still make great money.
So if your gut reaction to low profits is, “I need to raise my labor rate,” hang tight. That might not be the answer.
The One Thing That Predicts Profit? Productivity.
After looking at mountains of benchmark data, we found only one consistent predictor of profitability: productivity.
Our top-performing shops consistently hit 75–85% productivity. Struggling shops? Often below 40%. Some were charging over $200/hour but still losing money. Why? Because they weren’t selling enough labor hours to cover their costs. If you’re not productive, no labor rate will save you. You can’t price your way out of inefficiency.
LISTEN TO MY PODCAST EPISODE 171, FOR MORE ON THIS TOPIC.
Your Labor Rate Isn’t Just What’s on the Wall
Here’s something a lot of shop owners overlook: even if you think you’ve got a simple pricing setup, you’re actually working with two labor rates.
First, there’s your street rate—what’s posted on your wall or quoted to customers. Maybe that’s $200/hour. Then there’s your effective labor rate—what you actually collect per hour after discounts, coupons, canned jobs, and pricing adjustments.
If your software says you’re averaging $150/hour, then that’s your real labor rate. And that’s the number affecting your profit—not what’s printed on a sign. So when you start asking, “Should I raise my labor rate?” what you really need to ask is, “How do I raise my effective labor rate?” That doesn’t necessarily mean increasing your posted rate. It usually means reviewing your discounting habits, streamlining your pricing, and tightening your processes.
If your customers are paying $150 on average, and you want to bump that to $175, your first step isn’t raising your posted rate to $225. It’s cleaning up what’s already dragging you down. Get more value out of your current rate before asking customers to pay more. Don’t make them cover for your internal inefficiencies—fix the root of the issue.
My Gross Profit Is Too Low (What You’re Really Saying)
Often, when someone says, “My labor rate is too low,” they’re not actually talking about pricing—they’re talking about margins. Specifically, labor gross profit.
Here’s the formula: Labor Sales – Labor Costs = Labor Gross Profit
If your margins are tight, you’ve got two levers: raise labor sales or reduce labor cost. And unless you’re cutting technician pay (not recommended), you’re looking at improving sales. That’s where most shop owners start increasing prices.
But here’s the problem: even if you’re charging three or four times what you’re paying a tech, you could still be losing margin if the tech isn’t productive. Let’s say you pay a tech $50/hour and sell his work for $200/hour. That should give you a 75% margin. But if that tech only turns 20 hours a week, you’re paying for 40 and billing for 20. That doubles your labor cost per billed hour to $100—meaning your gross profit drops to 50%. And that’s assuming everything else runs perfectly.
So before adjusting your rates, ask yourself: Are my labor costs inflated by low productivity? If so, you’ll never fix the margin problem with pricing alone.
Want to Charge More? You’ve Got to Earn It
So what should you charge? Simple: as much as you can without hurting your ability to close the sale. Sounds vague, right? That’s because it is. It depends on your team, your customer base, your service level, and your competition. The market plays a role, but it’s only part of the picture.
Let’s say your costs require you to charge $300/hour. If your competitors are all charging $150, you’ve got two choices:
- Improve efficiency to reduce your cost per hour
- Justify the $300/hour with unmatched service and value
Some of you can absolutely command higher rates—especially if you’re offering a premium experience. Others may be pricing themselves out of the market without realizing it.
Don’t Compare Prices—Compare Value
When comparing your shop to others, don’t get caught up in the price alone. You need to compare value.
If three shops in town all charge $180/hour, but one has better communication, digital inspections, cleaner facilities, and a more professional vibe—that’s the one customers will choose. It’s not about price at that point. It’s about trust, convenience, and perceived value.
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