The Cost of Doing Business: To Charge or Not to Charge

Jul 1, 2022 | Industry

By Marty Hollingshead

Is the pain worth the gain?  Is the extra money you will get really worth all of the possible “bad will” that charging a new fee will create?

With the rising costs of fuel and wages, among other things, how do we effectively pass these costs to the customer?

First, let’s look at what our true cost to deliver is.

Have you thought about, or do you know, what your cost to deliver really is?

To find your true cost to deliver, you have to know a few things:

1. Fuel costs: Whether you use fuel from de-pollution of vehicles or buy it at the pump, it still has the same value.

2. Your labor cost: To calculate this, you need to take your driver’s gross salary and add 40 percent. This is the true cost to your company for any employee. This calculation encompasses benefits, withholding taxes, commercial insurance costs, as well as workers’ compensation insurance and unemployment compensation.

3. Your vehicle cost: How much did it cost and how long will it last? How much will it cost to service and maintain it?

4. Other vehicle expenses: License plate and registration costs, vehicle insurance, as well as any toll charges –these costs also need to be considered.

The Math

Here is an example of how to find the true cost to deliver:

Let’s say your driver is making $20 per hour. Adding 40 percent, his cost of employment would be $28.00 per hour.

Your delivery vehicle costs $50k.

This vehicle will probably last around 250k miles. You have to pay to service and maintain it.

It gets an average of 10 mpg (gasoline powered). Fuel costs $5.00 per gallon on average at this time.

Figure out the average number of stops for this vehicle per day.

Lastly, find the average miles driven per day for this vehicle.

Now, knowing these numbers, we can now figure out our costs.

Truck costs per mile = $1.00 per mile. This calculation includes $0.20 for depreciation (wear and tear), $0.50 fuel cost, and $0.30 for maintenance and repair.

Based on your driver working an eight-hour day, using our previously calculated cost of employment of $28 per hour, his cost of employment would be $224.00 per day. 

Lastly, let’s say your driver’s average daily distance driven is 200 miles. We now have our figures for a daily cost: which is $424.00 (driver’s employment cost plus distance driven multiplied by the cost per mile).

Now let’s divide that by the average number of stops per day, and we will have our cost per stop. For example: if your daily average number of stops is 20 your cost would be $21.20 per stop, ($424 divided by 20).

This is just an example. Your results will vary depending on your market size and whether it is metropolitan, rural, or somewhere in between. However, knowing this information will give you an idea of what your true delivery costs are.

Now that we know this, what do we do?

I personally don’t think it’s a good idea to just apply a “Delivery Charge” to most invoices. The thing to consider here is how this will affect your customer. For most of us, 75 percent of our business comes from steady or repeat customers, and they are either body shops or mechanical repairers. I can say firsthand this will not sit well with the body shops.

They will either have to try to charge this back to their customer (the insurance company) via a supplement, which costs the insurer about $27 in administrative costs, or more than likely they will “claw it back” from us in more “clean-up time.”

What about the mechanical shop that buys a small ticket item? Isn’t this the same guy that also buys high-dollar drive-line components?

I think there are times where it would be appropriate to charge a delivery fee, but this has to be considered on a case-by-case basis.

Is the pain worth the gain? Is the extra money you will get really worth all of the possible “bad will” that charging a new fee will create?

While we all have to be profitable to stay relevant and viable, I think there are better ways to do it.

Just take a look at e-commerce. All of the successful sellers have “free shipping.” How do they do this? They build their delivery/shipping costs into the price!

The lesson here for all of us is that business decisions are very much like playing pool. The smart player is thinking about how his next shot will affect his shot after that.

Think about that! 

Marty Hollingshead has been in the auto recycling business since 1973 and is the owner of Northlake Auto Recyclers, Inc., Hammond, Indiana, since 1984. Marty is on the ARA Executive Committee, currently serving as President.

He is a board member of the Indiana Automotive Recyclers Association. Both Marty and Northlake have received numerous awards and recognition for excellence in the industry and the community. Reach Marty at 219-937-3960 or visit www.narparts.com.

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