With auto repair, the flat rate system, is socialized pricing. This archaic method is remotely similar to the way they bill for health care costs. Rather than eliminating waste, the majority are over billed, to subsidize the inefficiency.
What is flat rate pricing?
In the auto repair business, most shops charge the customer based on hours. This is not an hour as most folks understand it. These ‘hours’ are based on an amount suggested in a labor guide. They are supposed to represent the average time the job takes, but many flaws exist. This method has been around for many years and causes a good deal of the mistrust the public feels toward the trade.
With flat rates, they do not charge customers for the time they repair their vehicle. They charge them based on the amount allowed in a flat rate guide. An example is billing one-half hour to replace the air filter that takes five minutes.
Why is flat rate pricing used?
Different shops use the flat rate system for different reasons. Most profess that the customer will not pay the real cost per hour. This is groundless, as the client pays the full costs every day. The true cost is simply hidden as excess hours, billed at an artificial rate per hour. For example, they charge the client for three hours on a job they complete in two. Three hours times $X per hour is the same as two hours billed at $1.5X.
This seems like a silly game to most people, but clients can easily compare rates per hour. Checking the hours billed, compared with the time spent on the vehicle is nearly impossible. Billing for more time than is spent is far easier than facing the real problems causing high costs. These shops may feel the artificially low rate per hour makes them seem more competitive. Fear of change to a better system is the leading reason flat rate pricing continues.
Gravy jobs and $50.00 Aspirins
Most jobs can be done in less than the time specified in the labor guide. Repairs shops sometimes call these jobs ‘gravy jobs,’ and highly seek them. Other work may require the full amount or more time than given. Dogs or losers are jobs that require more time to do than the labor guide states.
Avoiding the losing jobs and selling the gravy jobs drastically improves profit. This is where the $50.00 Aspirin comes in. Under this system, the business cannot avoid all less profitable jobs. Warranty work on a new vehicle is an example. A warranty guide gives far less time than client-pay guides. The injector flushes or intake cleaning is where they make up the money. These gravy jobs allow the business to make up the money they lose on warranty work. The client subsidizes the warranty process with unneeded wallet flushes, like the patient subsidizes the health system with $50.00 Aspirins.
Poorly managed businesses have higher costs than properly run companies. Inefficiencies, such as the rework, a lack of training and excess office personnel increases the costs the client must pay. An efficient shop may cover all over head and profit for $X amount per hour. The inefficient business requires $1.5X to do the same. Billing for more time than is spent is far easier than facing the real problem of inefficient operation. No wonder clients mistrust the system.
Roadblocks to a more honest system
Why not charge by the hour, for actual time spent? The ideal system would be a highly skilled and equipped technician, repairing the client’s vehicles and charging for the time they spend. Many false notions, and a fear of change stand in the way of a better system.
Excuses for not billing more fairly
Clients need an idea of what the job will cost, before they authorize the work.
The obvious answer is to allow the technician to diagnose the problem and use their experience to learn the time required. This provides a highly accurate system, where the job always cost no more than what they quote. If the shop estimates too much time, they reduce the price to the client to actual time. In the rare instance where they quote too little time, the business should absorb the loss as the mistake is theirs.
Not all technicians are equally skilled.
With a more honest system, this would be far less of a problem. The incentive would be to train people, so costs could be lowered and they could attract more business. A short-term solution is to charge a lower rate per hour for the lesser skilled technician.
A poorly maintained vehicle cost more to repair than one for which we properly care.
Yes, and stated the other way, people who take care of their vehicles do not subsidize those who do not. Averaging costs means some pay more than they should, while others pay less. Such a system punishes those whom they should reward.
A well-equipped shop would charge less time than a poorly equipped shop.
Again, the answer is yes and why not. An efficient shop attracts an abundance of clients and enjoys a healthy business. The customer receives value and refers their friends. Costs are lowered further, by efficient operation and a greatly reduced need to market.
Honest billing places the responsibility for improvement where it belongs, with business management. Inefficient operations are forced to improve or fail. Efficient operations grow and they better serve the client. Honest billing, for the time spent, is an idea that is far past due.