Every service department should know its breakeven number before it sets a labor rate or builds a menu, and Dave Rogers walks Steve Shaw of Shaw Dealer Training Group through the math on this episode of Fixed Ops Focus. With $100,000 in monthly expenses and a 70% gross profit, a department needs roughly $143,000 in sales to break even, about $20,000 per technician across seven techs, and dividing expenses by 40% instead builds in the profit, raising the target to $250,000. Steve ties it to pricing strategy, including the store charging $100 for an alignment that pays two hours, and Dave adds that parts-to-labor ratio, effective labor rate and capacity only make sense once you know your work mix and your starting point.
Closing the month and RO marketing feedback 0:00
Steve Shaw: Whew, here we go again, Mr. Dave Rogers. How you doing, sir? What's on your mind tonight?
Dave Rogers: I'm doing fantastic, Steve. Fantastic.
Steve Shaw: I love it. How'd your month close out? Did you have a good month for your company?
Dave Rogers: So far so good. We're still waiting on some statements, but overall we were up in fixed ops as a group, which is great. It was a bit of an up-and-down month. It started out slow and then finished up. You've got graduations and all that fun stuff. I could go back to my master book of excuses and find a couple for June if I looked it up. But it wasn't terrible.
Steve Shaw: I think a lot of people pulled it off at the last hour. You know what's funny? I got a lot of comments about the RO marketing piece, and I'd still like some more. After watching it and thinking about wrapping that whole thing up, it's pretty common sense. It's just common sense.
Dave Rogers: I've been talking to some of the service managers, and I talked to a general manager today on the way home, stuck in traffic, and the term that came out of this GM's mouth was "sheer genius." That's what he said. Now, this guy will push the envelope, which is good. He'll run it as hard as he can. A couple of people have expressed interest. One of my service managers mentioned he's going to try it in the express area, and a couple of others are thinking about it. I know some took the little synopsis home for the weekend and studied it. So I'll follow up on how they're doing later this week.
Start with the breakeven point 1:50
Steve Shaw: That's awesome. Very cool. Well, in those two episodes we both touched on a subject I think would be cool to talk about. You brought it up: breakeven analysis. In my travels as Steve Shaw, the behavior trainer, the MPI guy or whatever, it doesn't come up very often. So I wanted to throw it back to you. What are your thoughts? How do you approach it in your stores?
Dave Rogers: It's probably one of the first things I look at any time I grab a financial statement. In my fixed ops role, I'll look at the service department and the parts department. If they're losing money, the first thing I do is back into what it takes to break even. We strive for net 20, 30 or 40 percent of gross, but if you're losing money, you've got to start with the breakeven point. To keep the math simple: if you have $100,000 in expenses and you're only doing $90,000 in gross, you're losing ten grand.
There are a lot of reasons people give: "Dave, I don't know how the rent is allocated. I don't know how this is allocated." That's one of the things you have to look at in your fixed expenses. But generally speaking, the fixed expenses, your rent, your insurance and those items, aren't the majority of your expenses. The majority is above that: your variable, your semi-variable and your personnel expense. That's where you'll find about seventy-five percent of your expenses.
I used to fight with my controllers about it. They'd say, "The square footage of the shop is bigger, so you should pay more rent." And I'd argue that the showroom's closer to the highway, so their square footage is more expensive. They have better frontage. If you put my service department in the front, then maybe you can make that argument.
Steve Shaw: But you said it: how do you want it, Mr. Dealer? It's a fight we're not going to win. That's the first excuse: "We've got a high rent factor." Well, who gives a fuck? It is what it is.
Dave Rogers: Right. Ninety-nine percent of the dealers out there own the land, and the rent goes to their real estate company anyway. Whether it's split fifty-fifty between sales and service and parts, or fifty-five forty-five, the swing isn't that important when you get down to the breakeven. So you have to get rid of those excuses.
So say I have $100,000 in expenses. I take the gross profit percentage at the bottom of my labor column. I try to eliminate sublet when I do it, so it's customer pay, warranty, internal, PDI, whatever the case may be, and there's usually a subtotal line on your statement. I divide the expenses by that gross profit percentage, and that's the sales I need to break even. That's the backward math: divided by seventy percent, whatever the case may be. That gets me a breakeven before sublet and before any other adjustments, so it hedges the bet a little. If you make a little money on sublet, and as long as you don't lose money on unapplied labor, you're okay. I do the same thing in parts, looking at that bottom line number. You can do it in sales too: there are calculations for how much of the facility expense service, parts and used cars cover, and then you can find your new car breakeven, how many new cars you need to sell. But for fixed ops, that's the quick math.
Breakeven drives your pricing strategy 6:03
Steve Shaw: That's amazing, because again, we don't talk about it very often. I often get into pricing strategy conversations, and I'll ask, "What's your pricing strategy?" And they'll go, "What do you mean?" How do you price your work? We go through the whole litany of menu items and all the different maintenance items you can price. And I ask, "How do you know what this should be priced at?" Most of the time people are guessing: "I want $150 an hour. I want X, Y and Z flat." But wouldn't you want to base that on a concrete number? If my goal is to break even, or to do X, Y and Z, we should know our breakeven before we even start building a menu. What is our labor rate supposed to be? If we don't know our breakeven or where our owner wants us to be, the price of that alignment is irrelevant. Would you agree?
Dave Rogers: I think you have to keep in mind the competitiveness on certain things. But yes, absolutely. If you're looking at a startup store, or a store you just walked into, you have to evaluate all of that. I try to keep it as simple as possible. I'm going to focus on sales, not gross, when I first do this. What do I need to sell to break even, assuming my gross profit percentage stays the same? The competitive items, like an alignment, a rotation, an oil change, are going to shrink your gross profit margin, so you have to sell a little more to get there. But it should all work out if you have a good labor mix. You have to start out with something in mind, and you do have to look at your competitors and the going rate.
Years ago, you used to open the Sunday newspaper to the automotive section and see what Goodyear was selling tires for, what oil changes, timing belts and shocks were going for. Those were your competitive items. That's how you knew the local market. Now you have to mystery shop it. Nobody uses a newspaper anymore, unless you get the value bundle of coupons mailed to you.
Steve Shaw: My point was just this: if we don't know our breakeven or our goal for net profit, what should our labor rate be? We don't even know what we should be charging per hour. What's our capacity in the shop? If I've got eight technicians and a $100,000 nut to make, what does my posted door rate have to be to start with? I've got to figure that out first, and then work through the other numbers. And that's just breakeven. If my dealer expects me to make a profit, I should figure that in first. I think the breakeven number is probably one of the most important numbers we don't even talk about. It's not on normal people's radar.
The math: $143,000 to break even 9:29
Dave Rogers: If you take the example and keep the math fairly simple: $100,000 in expenses at a seventy percent gross profit means I need roughly $143,000 a month in sales. And like you said, how many lifts do I have? Say seven. I need $20,000 in sales a lift. How am I going to get to $20,000 a lift? If the guys produce ten hours a day, how many days a week do I work, et cetera. And then it goes back to your point: what's my labor rate going to be? What's my door rate going to be?
Steve Shaw: Right. To achieve $20,000 a lift or a stall, however you want to say it, I've got to start with a baseline, and the baseline is that I've got to make a profit. Then I figure out the other numbers. I do menus for people quite a bit, and I'll generally ask, "What do you want your gross profit to be? What do you want your effective labor rate to be?" I get some general numbers from them, and it's almost an assumption I make that they know what they're talking about. I had a guy one time up in your neck of the woods in Jersey. I asked, "What would you like your effective labor rate to be on your menu items?" He said, "2.1 hours a ticket."
Dave Rogers: Okay.
Steve Shaw: And I said, "Well, we need a timeout, because you didn't answer my question, and you obviously have no idea what we're talking about." Again, I'm the behavior guy, so I don't do that often. But I think about it quite a bit: there are people in these roles who are not being taught what a breakeven analysis is. They're not being taught that, and they're not getting down the right path. When it's all said and done, if I need $143,000 in sales, how many flat rate hours do I have to produce, and at what rate? That's the next step.
Dave Rogers: Right. You take the sales. I'm open twenty days a month, if that's what you're going to do, and I have seven technicians. You divide it by your technician availability and productivity. If you take a flat 200 hours a month per technician, just rough math off the top of my head, $143,000 divided by seven is about $20,000 a tech, divided by 200 hours, and you're talking about $102 an hour, probably, to hit that number. That's probably not that bad. I'm just winging it. But that's where your number would be.
Now, that's just to break even. Say I'm a greedy SOB, and I want twenty or thirty percent. Everyone asks how you figure that out. The shortcut is: if you're getting seventy percent gross profit, shave it to sixty, fifty or forty percent, and you're building in the buffer to get whatever you want. That's the cheap math. So $100,000 divided by 0.4 puts you at $250,000 a month in sales. I've got to put another hundred thousand dollars in sales on top of the breakeven. Now what does that math look like? Can I get there with the same seven technicians? Do I have to open six days a week? Do I need two shifts?
When you look at a business and face-value the financial statement, you have to come up with a number that's at least a target to get you where you want to be. If the store's doing ten percent net to gross, my next goal is twenty or thirty. Parts is going to trail, because about eighty percent of your parts sales come from your service volume. So you have to focus on service first.
When a great class meets a bad price 14:35
Steve Shaw: Of course. It just blows my mind. It doesn't come up in my lane that often, but after you brought it up and I was writing about it, I thought: when was the last time we really had a conversation about breakeven analysis, or net to gross? You said thirty percent. If somebody had asked me yesterday what a good number is, I probably wouldn't have had a good answer. That doesn't come up in my world.
Where it comes into play for me is pricing strategy. I use the alignment as a catch-all, because I'll go out and teach people how to sell alignments, and they've got their alignment priced incorrectly. They're paying two hours and charging a hundred bucks, so they've got a fifty-dollar effective labor rate on an alignment. You send somebody to my class, they come back all fired up, they sell ten alignments, and their ELR and their gross profit go down. So they're like, "Why did I spend money sending them to Steve's class?" Well, it wasn't Steve. Your advisor did everything you could ask, but your pricing strategy wasn't right, and you're giving away the farm. Good job for the advisor, bad job for the store.
Parts-to-labor ratio depends on the work mix 15:58
Dave Rogers: That's another one of those things. I had a conversation today with one of the DPSMs from the factory, comparing a few of the stores in our group. There was a big difference in the customer-pay parts-to-labor ratio between a few of my stores. This is a Japanese import brand, so you don't get a high parts-to-labor ratio as a general rule. Sixty-eight, seventy cents is right in there with a decent mix. One store was at fifty-six, and the others were right around seventy.
I said, "I kind of know that store, and I guarantee you they're cutting rotors and not replacing them. The other stores are replacing rotors." And that alignment rack is always full at that store. If they're doing a lot of alignments and a lot of competitive stuff, you're going to lower your margins and throw some metrics off. Does that mean they're doing a bad job? No, it doesn't.
My good buddy Joe Camarado, when we get him on here one day, will agree with this story. We went to a Toyota performance group they used to have in the region, and this guy Mark was up front teaching the class, telling us how great Toyotas were. They never break down. It's the greatest car on the planet. Can't disagree; it was a great car. Eighty-five percent of our work mix was maintenance and fifteen percent was repairs. And this guy's telling us we should be at, if I remember correctly, some stupid number like 85 cents to the dollar parts-to-labor ratio. For every dollar in labor, they thought I should sell 85 cents in parts.
Nobody was sophisticated enough back then. Nobody was really doing tires at the time. We were, but most stores weren't, and tires hit a different line anyway. They didn't count as a parts sale. So I'm sitting there with Joe going, "These guys talk out of both sides of their mouth. It's the greatest car in the world, it never breaks down, but they want a high parts-to-labor ratio," which is what you get with a car line that breaks down a lot. Ford, Chevrolet, GM, the European cars are always dollar to dollar, because you put a lot of parts in those cars.
Steve Shaw: Well, it's the diagnostic thinking we're lacking as well. I'd always say 0.8 to 1.2, depending on your brand and your market. That's your guideline. But if I saw a guy at 0.56, I'd ask: what questions do I need to ask to find out why he's at 0.56 versus 0.8, 0.9 or one to one?
Dave Rogers: So this gets under my skin. He says these cars never break down, and then he tells us we shouldn't do any additives with our oil changes. No BG, no MOA, whatever we were using. So Joe and I go back to the dealership, take out the owner's manual and look at the scheduled maintenance, every service up to thirty thousand miles. We take nothing but factory parts, including the oil, and the parts-to-labor ratio, if you followed the book exactly, was 43 cents to the dollar for the first 30,000 miles. So how am I going to get to 85 cents? The cars just didn't need much.
Fast forward, we come back, and we had a couple of brain surgeons in our class who had jumped. One guy, Tom, up in New York, the nicest guy in the world but not the brightest bulb some days, is bragging that he went up to something like $1.20 to the dollar in parts-to-labor. We ask how he did it, and he shows us the repair orders. He's spiffing his technicians to sell struts, shocks and batteries. I said, "Okay, most of the time our struts and shocks don't go bad, but if you've got a place to sell them..." He says, "Well, I'm spiffing it, and it really helped." So Joe looks at the repair order, and he was also running a 200 percent matrix on his parts to get there.
To your point: you can't get hung up on the minutiae, the parts-to-labor ratio, the effective labor rate, the hours per RO, until you figure out your work mix and your customer base. Are you doing all the basics? Are you providing a menu? Do you do a good multi-point? All of that is going to change those metrics. The only thing I know that's solid is that if I don't spend another dollar and everything stays the same, I need $100,000 to break even, and you've got to figure out a way to get me there.
Capacity: the coffee cup and the pitcher 21:17
Steve Shaw: There you go. Well, I'll go off on a tangent. You always talk about people having their cup: some people have a six-ounce cup and some have sixteen. I say the same thing about production capacity. I always look at capacity as a cup, and in so many of our stores right now, the capacity is this little coffee cup, and it runneth over. What most people do is hire one or two techs, and they're able to break even. "Okay, I'm collecting everything, I'm not losing these people, I'm not a week out, but I'm still one or two days out, and I can't sell anymore." But who's building their pitcher, so they've got double the technicians and can actually sell something? I can tie that all the way back to breakeven analysis. Yes, I could break even with my seven techs, but if I want to do X, I've got to have the bigger cup. I used to draw a pitcher of beer. We've got to have the availability, the openness, to do all those things.
Dave Rogers: That's how you have to look at it. I'm sitting here with my glass of beer, it runs low, and I need to fill it up. I've got to have a tap, I've got to have a pitcher. That's exactly what it is. And a lot of stores and a lot of managers are not constantly farming. They're not looking for new technicians or looking to backfill. Half the time they're not even out in the shop talking to their technicians. They don't know the guy's going to quit. They find out somebody quit when they notice his toolbox has been gone for two days.
You have to keep building the team from within, because those numbers get larger. Your expenses go up. You want to hire another person. This environment is not static. You can try to keep it stable, but it's never going to be static. And who's happy doing the same thing? Even if I was doing net 30 and making an extra thirty or forty thousand a month, it's not going to be good enough next year. You've got to figure out a way to get a little more out of it.
Calendar utilization and the numbers 23:43
Steve Shaw: Well, what's calendar utilization anymore? We used to always go by eighty-five percent. I can't imagine it's near eighty-five percent in the post-COVID world.
Dave Rogers: It's funny you say that, because years ago I used to go with ninety-three percent. I don't know where that number came from. I'd say you're probably close to eighty percent now, to try to get people to come to work. That's a whole other episode. Let's talk about work-life balance. Tori actually suggested we talk about carving out time for our health and about work-life balance. He said we should make an episode out of it.
Steve Shaw: I agree. It's so funny, every topic you and I talk about, I just wrote about in my upcoming book, to be announced later. Like work-life balance. I have never missed a lunch in my entire life. I promise you, as a manager, I am not missing lunch. It's mine. And I don't expect anybody who works for me to miss a lunch or a break. You're entitled to it. Do I go out and force you to take it? No. But I do my very best to make sure you have it available, and when someone says, "I'm too busy," I don't accept that as an answer. You get a 15-minute break every four hours. Take it. You get a lunch, whether it's 30 minutes or an hour. You need to take it. Our industry will let you work bell to bell all day, every day, if you accept that, and I personally find it a terrible practice. Without going into all the statistics, if I don't take a 15-minute break or a lunch, my productivity at the end of the day sucks anyway. So I'm all about finding a work-life balance and giving somebody a great work schedule, making their day pleasurable.
Dave Rogers: Let's make that the next episode. There's so much to talk about on that. What's the old expression? If you could go back and tell your twenty-year-old self what to do and what not to do, what would you say? Nothing, because I wouldn't have listened. A twenty-year-old doesn't listen to anything. But maybe we'll get through to one or two people with some thoughts, because that's what we're trying to do here.
But to go back to calendar utilization and availability: it's a huge part of it. If your sales number is $250,000, and you've got seven technicians you can only count on being there eighty percent of the time, you're going to have a rough go of it. If you have seven bays, you're probably going to need seven guys there six days a week. Or you're going to be on four-day work weeks at ten, eleven, twelve hours a day. But you've got to do the math, and it starts with the breakeven number. Where are you at today? I'm at $143,000. Where do you want to be in six months? Somewhere between there and $250,000. What do I have to do? Right now I need $20,000 in sales per tech per month to hit my number. Geez, I don't know if I can do that doing just oil changes on Kias. I might have to do something else.
It opens up Pandora's box. We casually mentioned this, and we'd be an amazing podcast if we ever planned this shit out and scripted it. It'd probably make more sense to people. But until you know the starting point, you can't figure it out. If you have a bigger shop, ten bays, it's not hard to hit $140,000 to $250,000 in sales. That's cake. Some of these stores are forty bays. Look at our boy Damon up in Canada. That dude's got, what, 45 technicians? He was turning some crazy hours. I don't know what his labor rate is up in Canada, but he's got to be doing over a million a month in sales.
Steve Shaw: I'm pretty sure he was doing a million.
Dave Rogers: It's got to be huge. I wonder what his breakeven is, though. I wonder if he's making any money. We've got to get him back on.
Steve Shaw: You were saying if we wrote this stuff down and got organized, that would be a training program. I have enough of that. I don't want to turn our podcast into training. I just like shooting the shit. We're not getting paid for this. These are just random discussions. But you'd better wrap us up with a GM tip of the day, and we ought to come back and talk about that next topic.
GM tip: show your fixed ops departments some love 29:07
Dave Rogers: GM tip of the day: look at your financial statement. Generally speaking, you came from the sales department. You know selling cars. Look at the four or five departments in that business, new cars, used cars, service, parts and body shop if you have one, and see which ones are contributing to the bottom line. I guarantee your service and parts departments are probably doing more net profit than your new and used car departments. Take a look and show a little love. Maybe work backward. If you're doing ten or twenty percent net and want to get to thirty or forty, you have to do the math.
Take a look at that statement when you get a chance. There's a lot to see on it. The biggest thing is to look at the net profit for each department and work from there. That's what you do as a general manager. You help plan it, you paint the picture, and then you sell it: this is what we need, this is how we can do it, this is how we get there. And as this wise old guy, Steve Shaw, said, it's just math, man.
Steve Shaw: Fixed ops is just math.
Dave Rogers: It's just math.
Steve Shaw: All right, let's get out of here. I'll see you next week.
Dave Rogers: All right, brother. Talk to you.
Price it right, then train your advisors to present it
Steve Shaw has spent over 40 years in dealership fixed operations, and the Shaw approach to fixed operations training has been proven in over 1,000 rooftops across North America. Customers buy failed items 76% of the time, so make sure every one of them is priced to make money.