Acknowledging that the ability of most automotive repair shops to be profitable on the labor side is much more complicated than the parts side, parts profits are just as often overlooked and have a similar negative impact on our bottom line. The sad and unfortunate truth here is that solutions are generally easy, generally doable, and generally ignored. In a common automotive business model, parts sales would represent somewhere between 40 and 50 percent of total sales, and with similar expectations for gross profit dollars, parts sales represent a profit opportunity that is too often unfulfilled and falls short of our reasonable expectations.
Unlike the labor side of our operation, which is affected in many ways, parts profit solutions are generally easy to implement and administer; it is quite simply deciding on an expected return or margin and applying a multiplier or formula to deliver that number. Reality would suggest that although the math works flawlessly, we humans are entirely capable of derailing even the best plans and procedures. We consistently miss our gross profit goals on parts.
In setting a benchmark on parts margin for a typical automotive repair shop, I would reasonably expect a gross profit margin (GPM) of around 60 percent. It is not that most shops achieve this number, but as an important first step I would at least be aiming there. To get there, we have to first understand what gross profit is. Quite simply, gross profit is sales less the cost of goods. Unlike the labor side of the equation, which is complicated by tech wages (cost of labor), gross profit is quite simply sales less whatever the parts cost.
If I have a part that costs me $60, wanting to generate a 60 percent gross profit margin, I multiply cost by 2.5 or 250 percent, or in other words I sell the part for $150. Working the formula, I would take that $150 sale price, subtract that $60 as cost of goods and arrive at $90 in gross profit and a gross profit margin of 60 percent ($150 - $60 = $90 gross profit or a 60 percent gross profit margin). Confused yet?
As we have seen in the provided example, an important step in reaching our benchmark is in setting a selling price. It might seem a simple matter of multiplying our parts acquisition cost by 2.5, but try that on an engine or a transmission and watch that smile disappear off your customer's face and duck the fist that might be following the frown.
Use a parts pricing matrix
The truth is that to achieve that ideal 60 percent gross profit margin and avoid angry customers, you will need to use a parts pricing matrix that would use a variable multiplier based on cost. This will apply a multiplier of 3 or 3.5 to the cheapest parts, yielding a margin well above the 60 percent benchmark and a very low multiplier of around 1.75 for those expensive component parts that will yield margins well below the benchmark.
Across the spectrum of parts that we would typically use, the matrix will yield a gross parts margin in the vicinity of our 60 percent benchmark. With our consistent use of a matrix, we can put our issues with parts profits to bed. Unfortunately, the consistency part is a huge challenge for many of us and we will need to revisit this process again and again. I would go to great lengths to encourage you to go with a matrix, very confident that it can solve any issues you have with parts profits forever.
I have seen variations and refinements to this process that set up two distinct matrices, based on where you bought a particular part; pricing parts is slightly different based on whether you had purchased it from a parts store (jobber) or from the dealer. Most important in all of this is our beginning to address our parts profit concerns. Most of the management systems out there will allow us to upload or apply a parts matrix but that darn override button we insist on using keeps us from seeing and feeling the benefit. Our beliefs and inconsistency keep getting in the way.
Take control of parts profits
Noting that many of us in the automotive industry suffer under the delusion that most of our customers are coming to see us because we are price-competitive (cheap) and conscious of the fact that the numbers and the process I just described here would qualify as borderline heresy, I would ask any shop owner to take control of their parts operation and commit themselves to making the profits to which they are reasonably entitled.
I promise that if you don’t tackle Mrs. Jones out in the parking lot and force her to take a discount, as you usually do, she will still love you and come back again and again. Hard to believe, it but she doesn’t come for price, anyway. She comes because she likes you, or because she trusts you or relies on you for the quality you represent. Parts prices only matter when you have nothing else to offer. Seriously!
Another important way we can improve our parts margins include asking for deeper discounts from our parts vendors (if we also adjust our pricing based on the above parts matrix to assure a reasonable return). and pay attention to what prices we end up charging our customers. Negotiating a great price with our vendors will mean little if we give it away in discounts.
Profits pay you and the rent, and Mrs. Jones will still love you (as always). I Promise!
