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:
- Exactly what it costs to be in business
- Exactly what it costs to run a call
- What amount of profit you’re looking for
- 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:
- Supplies & Parts
- Office Supplies
- Tires/batteries/ lights etc.
- Garage Keepers Insurance
- On-Hook Insurance
- Bank Service Charges
- Credit Card Fees
- Legal & Accounting
- Radio Services
- Truck Note
- Uniform Cleaning
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.
don your awesome you make the towing industry better.keep it up.
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!
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.
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?
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.
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.
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!
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.
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.
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!
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.
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.
Very cool, Don. Another thing we’ve found to be very helpful in terms of marketing is to make sure our site is optimized for all of the longer keywords that people might search. For example– “flatbed tow truck driver in Mesa AZ”. It’s easy to think that people will just search “towing” and the city or “tow truck” and the city, but these longer keywords will actually help you increase your traffic dramatically.
Thanks, I just ran a couple of preliminary scans on your site and your overall web presence. There are some really fundamental changes that need to be made to your site, you may or may not be able to do it make those changes with a Weebly site. If you would like some help let me know.
Great list! We are brand new in our market and are trying to get a target price. Never crossed our mind to look at “cost per call”. We still have to find that magic number around # of calls per month but I think we can get close with an estimate and then set a goal. We’ve found that pricing in this area is all over the place depending on who you call and what service. Hopefully we can develop some consistency around our pricing to attract some business.
Very interesting breakdown. I wish I would of thought of my service rates in terms that you put it in, in this article. It ws very easy to understand.
Thanks for the comment. All sorts of things can get in the way when determining your towing rates, municipal rate-caps, police rates, competition, third party police dispatching companies, motor clubs, and more. But one added benefit of using costs more wisely in determining rates, while it can be a daunting task, is that it can aid in helping you obtain much-needed rate increases with these bureaucratic entities. Thanks again.
What a great article! It’s really hard to set yourself aside in a city where your competition is running on lowball price. If you want to survive you have to adapt. This is what’s happening to us. We gave up to pretty uniforms and the cleaning service, we stopped advertising on several platforms like yellow pages and yelp and only do Google AdWords sometimes when calls are down more than 3 days. Your article reminded me that at the end of the day we are in this business to make money.
Thanks for your comment. If you would like a free evaluation of your online presence please call 314-328-9869.
I’m in my early 20’s. When I started my business 4 years ago, i was working for someone else. All of the information in this article, I picked up as I have been growing my business. Wish I knew some of this information beforehand, to plan ahead. I’m doing good, just would of been nice to have a head start . Great info.
I found it beneficial that your article brings to light that towing services determine their rates through many factors, such as phone services as well as labor and fuel costs. My spouse and I are interested in hiring these services in the future, so that we can be prepared should issues arise whenever we are on the road, as my wife and I believe that it is key to be diligent in one’s actions. We’ll be sure to find a local towing service that will be beneficial to what we need when trouble arises.
Would you say that these things are still true in determining towing rates?
-Sammy (Mesa Tow Truck)
Yes, you must ensure that you are making enough margin to pay all your bills, make a decent profit, and have money put back for future truck repairs, damages, and truck replacement. It’s imperative to think this way rather than worrying about what your competitors are doing. Thanks for the comment.
Hi Don, Im want to start in the industry but Im not sure how much to charge for a flat tire, batteries service, fuel ect. help me , already get your book,,,
Hi how are you first of all i just started my transportation company a few months ago and today i was transporting a car to the port and they did not wanted to received it as it was and the owner did not made the esfford to find a way of recovering his vehycle. After 7 hours of wait i send the driver back to home base and inform the owner of the fees he would get charge for extra miles, plus storage till he decided to get his car back and never received any answer about it. What will have to be my next step and what are the fees i can charge for storage and all in the state of FLORIDA. Could you please help me with this situation….
You are killing it, Don. This will help us tremendously at Flagstaff Towing. Keep up these awesome and informative posts.
Jordan, thank you for the kind words. I am glad that you found value in the article.
Wow, I just found this post and it was full of great information. Keep you the good work, we need more people informing the population like you with solid information. I will be reading your blog more often now I know where to go.
I’m glad you found value in the article, Thanks.
Don, This is great information for a new company thinking about started a Tow service company. Breaking down average cost will really help.
You can also get the tread depth of your tires by stopping by either of our locations and having a mechanic inspect them to determine if they need to be repaired or replaced.