How to Calculate Service Rate

Jupiterimages/Photos.com/Getty Images

A new business owner may need help establishing hourly or daily service rates. You can calculate the number of customers needed to reach your desired hourly earnings goal, while factoring your additional costs of doing business. Based on your hypothetical interest in general automotive technology, you might open a repair shop that performs oil changes, tune-ups and brake work. You can apply the service rate calculation to most types of businesses.

Set your hourly rate for service work. Call some of your competitors to determine the average service rates for companies in your area. Ask your competitors to provide service quotes for various job types. Get pricing for materials and labor. Review the information obtained during your market research to estimate your prices for comparable services. For instance, each competitor includes an estimate for parts and labor, if competitor “A” charges $79 for a automotive brakes, competitor “B” charges $95 for brakes and competitor “C” charges $89 for brakes, you might fare well charging somewhere in between, such as $90 for parts and labor.

Analyze your potential gross profit for brake jobs. Assume your brake pads cost $20 for each pair. Estimate one hour as the time required to complete a brake job. Reserve $35 per hour for your projected wages, plus the $20 cost for materials. Use the $90 gross earnings to withhold parts and labor costs of $55 to realize a $35 gross profit, before deducting your overhead costs.

Summarize your monthly overhead costs. For example, garage rent may be $1,000, equipment rental $400, utilities $750, telephone $100 and advertising $500. The monthly overhead in this example totals $2,750.

Divide your overhead cost of $2,750 by your $35 gross profit to calculate the number of billable hours you will need per month. You would need to perform a minimum of 79 brake jobs per month to meet your estimated overhead costs.

Identify your projected profit per month. Plan to complete 100 brake jobs per month to realize a net profit equal to $750 per month. Complete 100 brake jobs to gross $9,000. Subtract your parts ($2,000) labor ($3,500) and overhead ($2,750) from $9,000 to realize a net profit of $750 for the month.

Adjust your service rate upward to increase your profit or lower your service rate to offer more competitive prices. Check your hourly earnings to determine if your wages need modification in order to make a profit. Review your planned rate of pay for employees, as you may need to factor items such as benefits and unemployment compensation.

References

Resources

About the Author

Ray Cole has written professionally since 1999 and has designed dozens of Web sites. Cole writes for eHow and "SF Gate." As a small business owner for over 15 years, he provides mortgage services, credit-related help and financial planning for his clients. Cole is currently writing a book about personal finance. He has also studied and taught martial arts for over 31 years.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images