Are You Really Making Money on Labor?
Most dealers with whom I speak are convinced they’re making substantial profits on labor. Some even go so far as to give salespeople commissions on selling labor.
But that perceived profit just ain’t so.
I decided to declare my views on this topic after a recent conversation with another industry consultant, who wanted my opinion on the amount of compensation a salesperson should receive for selling the labor portion of a custom installation.
After hearing a lengthy explanation of why a salesperson should receive compensation, I asked if the dealer with whom the consultant was working had any idea of how much profit he was making on labor. I was told the dealer has a 40 to 50 percent profit margin on the labor component of the sale. I immediately knew this dealer was either charging very high labor rates or wasn’t looking at his true costs in the installation component of his business.
Am I opening Pandora’s Box or what? Questioning labor profitability? Of course it’s profitable! We charge three to four times our hourly wage for labor; how can it not be profitable?
Well, to be honest, it probably isn’t profitable, or at least not as profitable as you may think.
Let’s Be Honest with Ourselves
I’ve examined the utilization of labor in the custom market for nearly 10 years, starting with a research project for a PARA workshop I taught. At that time, I found that, at best, the utilization of labor with most custom retailers was typically about 50 percent, and rarely above 55 percent. I say “rarely” with the caveat that I haven’t studied every C-tailer. I’ve studied a good cross-section over the years, however, and never have I found a utilization over 55 percent in our industry.
I define utilization as those hours that are billed by the dealer for labor performed on a job as a percentage of the total time being paid. Sick days, vacation and personal time, warranty labor, reworks, replacements of defectives and so forth are all considered to be non-utilized labor, for which the employee gets paid but the dealer doesn’t receive compensation from a customer.