Preparing to go into business, What is the Difference Between Fixed and Variable Costs, How Does That Effect Me?

Michael Mobile Technician Utah Posted   Latest   Edited  

More and more members of Diag​.​net are asking about starting a mobile diagnostics and programming business. There are many basics that have to be covered before purchasing tools and getting a business license. Maybe at some time my jumbled mind can put all these principals in order. I think this one is very important. It can make or break you.

What is a fixed cost? In life and in business we have fixed costs. A mortgage or rent is a fixed cost. (in most cases) If you average utilities over the year, it is a fixed cost. Car payment fixed cost, 

What is a variable cost? A variable cost is one that changes. It may or may not be in your control. Meals are a variable cost. You can go to Longhorn and spend $30 or cook and eat potatoes with salt and butter at home for $1. You can choose to go to the movies or you can stay home. You could fall and break your arm requiring a visit to the ER.

How does this apply to business?

In business you have costs that are there no matter how much or little product or service you produce. These are fixed costs. Insurance, Rent or Property Payment, Water and Sewer, Business License, Garbage Collection, Averaged Power and Heating costs, Service Information, Long Term Subscriptions. The rent is due no matter how much money you make. Those who serve you expect payment.

In the automotive repair field we have variable costs too. Parts Bills, Short Term Subscriptions, Towing Charges, Transportation Costs, Labor Cost, Collections Cost, Legal Costs.

I have a mobile business. I chose this route vs. brick and mortar to reduce the fixed cost. My idea was that the less fixed monthly cost, the easier it would be to weather the slim times. Some fixed costs can be converted to variable (on demand) costs. An example is that I use OEM subscriptions. When I started, I purchased the subscriptions on short term. I would try to stack up jobs over a couple of days to increase bang for my buck. If I am not driving, I do not incur transportation costs. My office is in my home. This is actually a tax advantage and I incur just a little more cost for resources in my home. As my client base grew, I had to convert the subscriptions to fixed. The change was made when I could see the cost per vehicle dropped below the cost per short term subscription. For instance the subscription for Chrysler is about $40 for 48 hours. On the last assessment our cost per vehicle for Chrysler product is $8 per vehicle. The more you do on the long term subscription, the lower the cost. For Toyota the choice is still short term. We just don't get too much call for Toyota updates. Honda is $10 for short term. We would have to do almost exclusively Honda to want a year subscription.

If you are looking to start a mobile business there are some things to keep in mind when it comes to expenses. Consider that at least 30% of your time will be commuting. You are going to wear out vehicles about every 4 to 5 years. (At least that is my experience) There are going to be stops you will loose you backside on. Until you get a feel for the business and your clientele, be prepared to live on savings, in your parents basement, or in your car. Expect to spend $35 to $50K a year on tools and software. Keep in mind those expenses that hit you every month or year. Car and business insurance is usually in the $1K per year range each. Have money set aside for this. Mine is billed yearly. SURPRISE! If you finance equipment, read the fine print. Most diagnostic equipment is done on a lease and ends up costing 21% to 30% annually. There is no way to save the service fees if you pay early. Your best option is to save your money and buy outright. Not having the payment can help you through the slim times. Learn to live on rice and beans. When starting a business you need to save resources. Make sure those whom you love know what they are getting into. It is not easy but it is worth it. 

If you are looking at brick and mortar I would suggest that you speak to shops in the area. Look at how busy the local shops are. Check and see what the local family income is like. From interviews with successful shops they tell me the targeted family income is $75K to $100K. This is enough to pay the bills but still sways them to the aftermarket vs. dealership. Starting a shop is a big undertaking. You may need some rich friends to do it right.

My suggestion to all looking at starting any business is to look for ways to reduce fixed costs. Look at the margin potential. (cost vs. revenue) Make sure you have a solid plan. Have an exit strategy. Spend money you have. Keep a safety stash of cash for the unexpected. Take as few risks as possible.

-Mike 

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Michael Technician
Massachusetts
Michael Default
 

Great advise thank you for sharing it with us.

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Benjamin Diagnostician
Tennessee
Benjamin Default
   

I definitely agree with the planning on living on savings when starting. Many of my first larger clients were net 30 and invoices were sent in on the 1st of the month to corporate. Then they have 30 days to pay. So potentially you may not see a dollar in your hands from your first jobs for almost 3 months. I would never agree to this payment plan on people that call only a few times a month, but…

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Chad Mobile Technician
Florida
Chad Default
 

I’m so glad you did this write up. I like all of your posts. I can tell you are a veteran. I just started my mobile business. I decided to take the leap. That being said it is not programming just basic mobile mechanics. I thought to myself, if large corporations pay me well to fix their clients vehicles then I should be willing to invest in myself. My question to you is knowing what you know…

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Michael Mobile Technician
Utah
Michael Default
 

Hi Chad, I would charge the same rate as the average shop does if you are doing diagnostic work. If you are swapping parts it is going to be hard to get top dollar. You need to establish who your customer is. Are you going to work with shops or are you going to work with the public? My opinion is that working with shops would be the best way to go. The public that calls for a mobile mechanic…

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Chad Mobile Technician
Florida
Chad Default
 

Mike this is a great help. Thanks so much. It’s a lot to take in so this will be reference material for me haha. I’m currently servicing the general public. As I don’t have capability to program nor the experience. I plan to learn just like I did with the rest of all this. 55$ labor rate which is roughly half the big corporations And dealerships. I figure when I start getting really busy I’ll…

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Bill Owner/Technician
Michigan
Bill Default
 

Chad with a labor rate that low expect to draw in the most desperate customers.... You will be busy all right but will you be profitable??

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Anthony Technical Support Specialist
Pennsylvania
Anthony Default
 

Hi Bill: Without a cushion, the first couple of warranty situations will put him down. It's beyond me why some people think that they need to be in a race to the bottom of the barrel to see who can lose the most money the fastest. The only good thing about it is that it culls the herd. The downside is that it creates AG for others; i.e. shops contending (or attempting to) with the former…

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Chad Mobile Technician
Florida
Chad Default
 

Nice post Anthony. That’s the kind that really adds fuel to my fire. This is my first business ever. It’s been a journey just getting the door open. One customer I helped yesterday drives a 2007 bmw z4. Has 108000 miles. Single lady. She was referred by another customer of mine, family friend. She was quoted 2200 for the radiator and expansion tank by a local shop. I was asked to verify these…

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Michael Mobile Technician
Utah
Michael Default
 

Hi Chad, Some of the BMW radiators have an Ozone coating and detector. Those parts are far higher than standard. Make sure you have the appropriate parts. -Mike

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Anthony Technical Support Specialist
Pennsylvania
Anthony Default
 

Hi Chad: Thank you. I thought that it was. It'll be even nicer if people considering opening a business take it, and the other responses, to heart. Two things come to mind. You "lightly" touched on one of them. Let's start there. Assuming that you are a one-man band, you'll be doing fantastic if you can get 50% productivity. While that is a stretch but doable, anything more than that is…

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Chad Mobile Technician
Florida
Chad Default
 

Anthony. I’m very limited to what I can do. Diagnostic wise I only have a modis edge, Matco max me and Alldata mobile basic. Mhen I use the scope customers are amazed as most have never seen a mechanic with one and I instantly have them hooked. But we both know how limited I am with these devices. I have not displayed my rate and figured this business is a snow ball effect. The more customers…

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Anthony Technical Support Specialist
Pennsylvania
Anthony Default
 

Hi Chad: Let me ask you a question. If you wish to purchase something. The price is going to be what the price is. If you can only come up with a fraction of the price, can you make the purchase (assuming that financing isn't an option)? The reason that the analogy fits is you wrote you are fairly poorly equipped to be a shop at the moment. The money needs to come from somewhere to change this…

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Michael Mobile Technician
Utah
Michael Default
 

Chad, Be careful with your labor rate. Your regulars will get used to it and then be offended when your rate goes up. Don't sell yourself short. Maybe look at a rate 80% to 90% of the common one. You are going to end up spending all your time trying to make money and your money paying for tools. Keep in mind with mobile you can spend up to 50% of your time commuting and running for parts …

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Chad Mobile Technician
Florida
Chad Default
 

Yes I see that. I thought I could raise the pricing as I went. I just needed to get rolling. I have not advertised the labor rate. That’s just what I have been charging. yes I have been getting customers and they all say yes so far. One of my regular customers asked for a quote on a for a driveshaft on Subaru Outback. I told hik labor was .8 hrs which was about 45$. He too said I needed to…

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Michael Owner/Technician
New Jersey
Michael Default
 

Double that labor rate immediately. Otherwise you'll be making a major mistake.

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Chad Mobile Technician
Florida
Chad Default
 

yes sir. I am. Many here feel that way and some of my customers do as well. Nothing better than a raise

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Nelson Technician
Kenya
Nelson Default
 

Thanks for this great insight,i will for sure follow your advise

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Sam Mobile Technician
Michigan
Sam Default
   

great advice Mike, I would like to add a comment. When someone starts a business similar to yours and appears to be competing with you. Take it lightly. Meet them for coffee. Introduce yourself. Don't talk business and never give any customer info away. Talk about hobbies at home etc. You may find a great asset for sending business to when you cannot handle it all. I always introduce myself to…

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Chad Mobile Technician
Florida
Chad Default
 

Excellent topic same. I was wondering how to handle others in my area. Id rather have resources than enemies

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Dennis Owner/Technician
Michigan
Dennis Default
   

Chad i have to agree with everything said so far.I do however think 1k a year for insurance seems cheap​.​Mine is alot more for my small 3 bay brick and mortar operation but I'm also lumping UIA and workmens comp insurance with that​.​Also something to consider if you have a family you should definitely talk with your spouse about the hours you need to put in to make it work in the…

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