Determining Rates For Services

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Determining Rates For Services

One of the first questions towers ask is: How much should I charge?

You’re in business to make money and you don’t do that by working for nothing.  The first thing you’ve got to be sure of is that your lights stay on and the trucks stay running- Anyone with a pulse can do that.

But you want to make a profit.

One method of setting your rates is to start by determining these four things:

  1. Exactly what it costs to be in business
  2. Exactly what it costs to run a call
  3. What amount of profit you’re looking for
  4. And what the market will bear.

Now when I say (determine what it costs to be in business) many only  tally up what it costs for insurance, fuel, utilities, and other monthly expenses but they leave out a lot of important stuff.  You wouldn’t want to exclude truck repairs from your expense column- but it’s commonly left out due to its sporadic and unpredictable nature. Also- damages, licenses, legal expenses, taxes, and accounting expenses are often forgotten- because they’re not felt monthly. In order to get an accurate cost of doing business you need to take into account every dime you spend.

The best way to track your overhead is to have a dedicated and separate account for business and use some sort of accounting software that you update daily.  It may sound like another job entirely- but it’s an important factor in getting your rates right- and making a profit.

One of the biggest mistakes I see towers make is not including their truck mortgage as an expense.

I get it, I understand that when you pay your note down it slowly moves your truck, more fully, into the asset column.  And yes your accountant depreciates it at the end of the year, decreasing your taxable income.  But for the purposes of determining what your rates should be you should definitely consider your truck note an expense.

A couple of things to consider: If you’re just starting out you won’t have a lot of customers which means your cost per call will be too high to be competitive. So you’ll need to start with an imaginary number, a guess of the number of calls you expect to run on a regular basis–This will help get you close to your cost per call.  And even if your plan isn’t to hire employees in the future…error on the side of caution, and figure in an hourly employee expense with payroll taxes added- so you don’t short yourself.

Start by adding all the costs associated with being in business (overhead) for the year– Below is an example of expenses for the towing industry:

  • Repairs
  • Maintenance
  • Supplies & Parts
  • Office Supplies
  • Tires/batteries/ lights etc.
  • Advertising
  • Insurance
  • Garage Keepers Insurance
  • On-Hook Insurance
  • Bank Service Charges
  • Credit Card Fees
  • Legal & Accounting
  • Taxes
  • Radio Services
  • Rent/Mortgage
  • Truck Note
  • Telephone
  • Uniform Cleaning
  • Utilities

Total these costs- this is your overhead, what it costs to be in business.

Then take the number of calls you run on an annual basis and divide your overhead by that number:

(Example: If overhead= $150,000 divide that number by the annual number of calls 10,000=$15) This is your average overhead cost per call

Next determine how much it costs to run those calls. These are the operating expenses, expenses that are directly effected when servicing your customers.

These are Labor and Fuel.

So as to continue with our example let’s assume that the annual fuel expense is $70,000 and annual labor cost, including dispatching and payroll taxes is $200,000. We’ll add those together and get $270,000.

(Example:$270,000 divided by the annual number of calls 10,000= $27) This is what it costs, on average, to run a call

With these 2 numbers in hand you can begin to get an idea of what the minimum average charge per service should be.  $15+$27=$42.

So, in our example, the break-even point is $42.  The next step is deciding how much profit we need per call.  If you’re running 10,000 calls per year- and spending $420,000 to do it- You’ll want to get a reasonable return.  But don’t sell yourself short- the unexpected will happen and you’ll have expenses you didn’t count on.  You want to be sure you can meet those needs when they arise.

(Example: 10,000 calls per year at $28 per call= $280,000) This is the amount of profit you expect to make annually

We now have all three numbers: $15 is the average overhead cost per call, $27 is the average operational cost per call, and $28 is the average profit per call. $15+$27+$28=$70

So, taking into consideration the above costs and the expected rate of return (the amount of desired profit) the average price per service should be $70.

But, if after doing all this, you then realize that the market will not bear what you’re asking.  If you learn that customers fail to respond favorably to your rates because your competitors have priced you out of the market.  You’ll then need to make some tough decisions.  Decisions that may include down-sizing, refusing service to low-ball customers, changing your employee compensation strategy, using a different type of truck- or many other money saving moves that will allow you to be more competitive.

The best position to be in is to be able to do all  this well before you become encumbered with unnecessary expenses and overloaded with too much truck debt.

 

About the Author:

Don G. Archer is the former owner of a 12 truck, 20 employee towing business. He now spends his time helping others build and start successful towing businesses around the country. Don is a multi-published author, educator, and speaker and is known as the tow-evangelist, www. thetowacademy.com Want to learn more? Email him direct at don@thetowacedemy.com

13 Comments

  1. steven grybko March 10, 2015 at 6:04 pm - Reply

    don your awesome you make the towing industry better.keep it up.

  2. Cory Cunningham July 24, 2016 at 11:39 pm - Reply

    This is great information Don! Breaking down how to calculate on average what our expenses as tow company owners really sheds light on the mindset and goals that need to be set to be competitive in the industry.

    Thanks for the great information here at Tow Academy!

    • Don G Archer July 25, 2016 at 10:43 am - Reply

      Cory thanks for taking the time to comment
      Not knowing your costs can get you into a lot of trouble. For example, if someone, new to the industry, begins working for the clubs and feels like they’re doing really well, because they’re truck is always rolling, and they use that activity as the deciding factor to buy a second truck…if there’s no other business to support that second truck…they may be making a big mistake.

  3. Ron October 16, 2016 at 12:04 am - Reply

    This is good stuff, Don. Agree that for starters we have to amortize the fixed costs across an average year’s worth of calls and come up with at least an amount to cover those costs, then try to add enough profit in. I had to test a few price points to see what the market would bear where I’m at in Arizona. At my Yuma Tow Truck company, I started at $50 just to get customers, then raised local towing to $75, but my calls dropped off too much. I’ve settled at $65 and it seems to be a good balance.

    Do you have any insight into which strategy is best or or more popular in finding a good balance? Do you think a Wal Mart type low price strategy where you make money with volume is a better approach than settling in on a little higher price and fewer calls?

    • Don G Archer October 17, 2016 at 12:20 pm - Reply

      Thanks for the comment, I really appreciate your willingness to add to the knowledge-base here.
      I understand the idea of a loss-leader, and although I believe it works for Wal-mart, bringing in shoppers who might otherwise go elsewhere…and once they’re in Wal-mart’s betting most shoppers will find something they can’t live without. And I think that you can absolutely leverage motor clubs to your advantage, but when you’re just starting out you can’t afford to lose on ANY calls, and really you shouldn’t. But I believe towers shouldn’t sell themselves short,You are more than just a guy with a tow truck. You are NOT a commodity, you are providing a personal service, solving a problem. Selling on benefits while being competitive is the best route to go.

  4. Bob Johnson October 19, 2016 at 1:46 am - Reply

    Don,

    This is fantastic information. One of the most difficult aspects to being the owner of a tow truck company is pricing your services correctly. I know when I started out at Scottsdale Tow Truck Company, I was someone who was willing to negotiate a little bit to be sure that I got the job– because I hadn’t figured out my pricing structure just yet. People like to shop around a bit when they don’t need a tow truck right at that very moment. Maybe they need to get that old vehicle– that’s been sitting in their backyard for years– towed to a different location. So they can afford to call around to different companies and see what prices they get quoted. That’s not as much of a pressing issue as the person who is stuck on the side of the road after a long day of work. They just want to get home. I think it’s important to find that balance between getting the price that you are worth for your service, factoring in the maintenance expensed you have for your fleet, and remaining fair to the customer. A good reputation as an honest, local tow truck driver goes a long way. This article does a great job of explaining that. Thanks for taking the time to share your insight– it’s very helpful.

    -Bob

  5. Bob October 25, 2016 at 11:41 pm - Reply

    I own a local Towing company, and what you have shared and what I read here was really beneficial. I’ll be sure to review our pricing and update our expenses. Running a towing business is definitely not a walk in the park, there is a lot of things going on the shop and with the crew. But I’ll be sure to take a closer look at our finances so I’ll be able to provide great services and still profit from it. Thanks! Really appreciate this!

  6. AH November 4, 2016 at 4:48 am - Reply

    Another easy way to determine the tread depth is to stop by to either of our locations and have a mechanic assess your tires to see if you need tire repair or replacement. If you need new ones we will provide options so that you get the best fit for your budget and your driving style.

  7. Carl Heilman November 19, 2016 at 5:57 am - Reply

    Seriously enjoy your meticulous way of breaking down this info about establishing our towing service rates. I think so many tow truck companies may miss the mark & not take the time to “slow down to speed up” and get this right. It is A LOT to take in but well-organized & articulated. In the fast-paced world we live in where our attention is pulled in many directions, this is great info to digest & can arm anyone with a tow truck business for success.

    Don, GREAT great value for sure. I sincerely appreciate the time & effort you put into developing it.

  8. Nathan December 16, 2016 at 1:36 pm - Reply

    Awesome advice, Don. It’s also helpful to be able to calculate the value of your advertising and marketing efforts. Understanding your return on marketing/ads investment can allow you to scale up your business when you find strategies that produce profitable returns on marketing investments. Keep up the great work, Don!

    • Don G Archer December 16, 2016 at 1:46 pm - Reply

      Nathan, thanks, you are right, knowing what’s working and what’s not is important. Marketing should be an investment in your business. You should track each channel’s performance and make informed decisions to either increase, decrease, or cut it out all-together, otherwise you might as well throw your money out the window.

  9. Salemtowservice.com May 10, 2017 at 6:24 pm - Reply

    Thank you for such a great article. Sometimes the hardest part of being a tow company is keeping the numbers balanced and the money coming in. The Process of doing the actual tow is the easy part.

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