Parts markup?

Jay Huh · February 9, 2017

Because of the way I started my business, I have never really marked up my parts much, if at all. Right now I am just doing a flat 40% mark up (multiplying by 1.4). It used to be at 1.3 a few months ago. I blow everyone out the water with prices though.

Because of that, my margins are low- always hovering around 50%. I want to get it consistently 60% and higher.

I am thinking about implementing a parts matrix I saw on R+W. Using their numbers, I think my customers will have sticker shock! But I just changed my system over. Looks like they want me to mark up over 300% for lower cost items but for the most part marking up 225% range (multiply by 2.25). Huge difference. In the past, I've been careful to not charge more than what the auto part store charged in store retail.

Thoughts on parts markup? Should I continue with implementing the parts matrix?

ncautoshop · February 9, 2017

That might be slightly high and fluids should be excluded. I run around 50% from say $50-250 and begin dropping it back down. I hear some flack on brakes and things in the top of the 50% range. Below $50 is higher but we've had trouble with our management software excluding fluids which can be a pain!

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Jay Huh · February 9, 2017

Thanks! Yea that def makes sense on the fluids and I reflected that on my matrix. Also I bumped everything down bc I did some test quotes and prices were insanely high. Even with me understanding shop costs, I would have a hard time buying as a customer.

I changed it to 1.7 for $5-150 and 1.5 for 150 and up.

mspecperformance · February 9, 2017

You might be getting confused as to the difference between Parts Mark Up and Gross Profit Margin.

https://www.entrepreneur.com/article/275856

Most industry standards you want to get 50% GP or better. In simple terms if you buy a part for $100 you want to sell that part for $200 to get a 50% GP. The purpose of using a matrix is to get more GP on lesser dollar parts and charge to get a less GP on big ticket items such as engines and transmissions so that in the end you will average out to 50% GP or better.

I would seriously put this as your top priority because it's the easiest thing to fix and you'll see dramatic results from it. Besides all that I know you have posted you are opening a second location. This is beyond a fundamental principle you should implement before going beyond 1 store.

mmotley · February 9, 2017

I would seriously put this as your top priority because it's the easiest thing to fix and you'll see dramatic results from it. Besides all that I know you have posted you are opening a second location. This is beyond a fundamental principle you should implement before going beyond 1 store.

What Mspec said. Parts margin of 50% and labor margin of 70% are basics and easy to implement. It made a huge difference for me when I started hitting those margins, and looking back, it was one of the easiest things I did. I think Bob O'Connor said something like 'all it takes is a #2 pencil and a mind change'. Sit down, do the math, and implement.

Also, you don't have to jump to 50% over night. Get to 30% one month, 40% the next month, and 50% after that if you feel your customers are gonna freak

Edited February 9, 2017 by mmotley

mmotley · February 9, 2017

Thoughts on parts markup? Should I continue with implementing the parts matrix?

Spend a day on R+W website, Eliteworldwide, shopownermag, etc, etc, and you'll see every successful shop is hitting 50% GP, every coach advises 50% GP, and the shops not making it are not hitting 50%...

Jay Huh · February 9, 2017

Thanks guys, that is helpful for sure. My margins have been hovering at 50%. I just signed on a master tech- I promised him $25/hr and my shop rate is $75. I promised him $28/hr in 2 months when I raise the shop rate to $80. My other 2 techs will be paid $20. That $28 is more than 30%, you guys think it's ok?

mspecperformance · February 9, 2017

Thanks guys, that is helpful for sure. My margins have been hovering at 50%. I just signed on a master tech- I promised him $25/hr and my shop rate is $75. I promised him $28/hr in 2 months when I raise the shop rate to $80. My other 2 techs will be paid $20. That $28 is more than 30%, you guys think it's ok?

Your overall GP should be around 60%. Parts 50%, Labor 70%. 1:1 ratio.

At those figures you are you are at 67% GP on labor ($25/hr for tech and $75 for labor rate). at $28/80 you would be at 65%.

Jay Huh · February 9, 2017

Your overall GP should be around 60%. Parts 50%, Labor 70%. 1:1 ratio.

At those figures you are you are at 67% GP on labor ($25/hr for tech and $75 for labor rate). at $28/80 you would be at 65%.

Sweet, thanks

Wheelingauto · February 9, 2017

Your overall GP should be around 60%. Parts 50%, Labor 70%. 1:1 ratio.

At those figures you are you are at 67% GP on labor ($25/hr for tech and $75 for labor rate). at $28/80 you would be at 65%.

This is provided he has 100% EFL which I highly doubt.

Jay Huh · February 10, 2017

This is provided he has 100% EFL which I highly doubt.

efl?

Wheelingauto · February 10, 2017

efl?

UGh.....typing too fast and not re reading....ELR.

Effective Labor Rate. You say you charge $80 per hour. Lets say you have 4 techs each working 8 hours a day and they were 100% efficient. 8x4=32 32x80=$2560 = 100% elr

Lets say you collected $2200 in same scenario. 2200 divided by 32 = 68.75 divided by 80 = .85% elr.

This is the basic scenario, it can be more complicated with a lot of other factors but this is a start.

mspecperformance · February 10, 2017

UGh.....typing too fast and not re reading....ELR.

Effective Labor Rate. You say you charge $80 per hour. Lets say you have 4 techs each working 8 hours a day and they were 100% efficient. 8x4=32 32x80=$2560 = 100% elr

Lets say you collected $2200 in same scenario. 2200 divided by 32 = 68.75 divided by 80 = .85% elr.

This is the basic scenario, it can be more complicated with a lot of other factors but this is a start.

Definitely right. First things first though to set labor rates and parts margins that will get you at or over your target margins. Measurement of ELR would be the next step.

Wheelingauto · February 10, 2017

Definitely right. First things first though to set labor rates and parts margins that will get you at or over your target margins. Measurement of ELR would be the next step.

To set a margin is one thing, to actually achieve it is another. I belonged to 20 groups for many years and I can tell you there are many who mean well but never get there.

Jay Huh · February 11, 2017

ok where and how did you guys learn this?

mspecperformance · February 11, 2017

To set a margin is one thing, to actually achieve it is another. I belonged to 20 groups for many years and I can tell you there are many who mean well but never get there.

Again I agree however the OP needs to start at step 1. Jumping to Step 2 and beyond will not help him if he doesn't understand the foundation of starting off with the right margins.

mspecperformance · February 11, 2017

ok where and how did you guys learn this?

I would say the majority of successful shop owners either have a business coach from one of the industry's consulting companies OR as wheelingauto pointed out 20 groups which are peer learning groups lead by a facilitator or facilitators.

ncautoshop · February 11, 2017

I learned from the Mitch Schneider series

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Wheelingauto · February 11, 2017

I originally learned from Mitch S seminars, then local get togethers and then 20 groups. As I have said in multiple threads, Jay, u need to learn and be a business owner quick. All these ideas are great but if u don't grasp structure and understand business matrices you will most likely run out of steam before you make real money

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Wheelingauto · February 11, 2017

Basics like gross profit, difference between mark up and margin. Tech efficiency productivity. Then how to measure, monitor and adjust.

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Jay Huh · February 12, 2017

I originally learned from Mitch S seminars, then local get togethers and then 20 groups. As I have said in multiple threads, Jay, u need to learn and be a business owner quick. All these ideas are great but if u don't grasp structure and understand business matrices you will most likely run out of steam before you make real money

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where can i get this mitch s seminars and 20 groups? I have 1 guy I talk to often and consider a mentor, I worked for him as an advisor years ago and he's still in business. All his methods are unconventional but somehow works. I've managed a national chain for a year before (NTB) but other than that little to no experience

ncautoshop · February 12, 2017

I've got some, I let another shop borrow some of the good ones and they never returned them. I'll let you borrow next time you come through this way or I'll mail them and let you mail them back. Here's a link https://www.amazon.com/Automotive-Service-Management-Operations/dp/1401826652

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Jay Huh · February 12, 2017

I've got some, I let another shop borrow some of the good ones and they never returned them. I'll let you borrow next time you come through this way or I'll mail them and let you mail them back. Here's a link https://www.amazon.com/Automotive-Service-Management-Operations/dp/1401826652

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Thanks for the link, just bought it

A&H Automotive · February 13, 2017

This is provided he has 100% EFL which I highly doubt.

True, most shops do not charge .3 or .5 to do an oil service but pay their techs that. This can be the biggest influence on the EFL depending how many you perform. You could add a matrix to your labor rate to help combat this.

carolinahigear · February 15, 2017

I break out my oil services and tires from my weekly report to get a true GP% and labor efficiency %. I have been working on raising my "measured" gross profit for almost 2 years and it is coming up gradually. You must measure it to chart it!

Wheelingauto · February 15, 2017

I have always been taught tires are a separate income line with a separate GP target. I would not and do not break out oil changes/oil services for that gives me an inflated number which makes me feel good but does nothing for the true number. As we try to grow our businesses capturing all services (loyalty) is key and will lower our numbers but should be part of the measurement IMO.

Jay Huh · February 15, 2017

ok true, I have a bunch of can jobs which are not 100$ EFL

jfuhrmad · June 14, 2017

I realize this post is 4 months old, but it I think this is the right place to post this.

What can be done to raise ELR if you have 100% on non oil change and tire ROs? We are almost always at 100% except oil changes and tires.

I've heard of shops with over 100% ELR. Are they just measuring it wrong or is it maintenance services or what? The only way I see to have over 100% ELR is to either short your techs, charge over 100% for diagnostics (very justified if you ask me) or have maintenance services where the packaged time is more than the time paid to the tech. What other ways could you raise ELR?

Wheelingauto · June 14, 2017

You've pretty much answered your own question. 2 for one diagnostics will increase EFL and maintenance (packaged) items such as a flush you charge more than 1/2 hours labor but credit the tech for 1/2 hour. My question back to add to the discussion is why are you looking at ELR? I used to belong to a 20 group and they had us looking at a lot of different metrics. While it is important to know the metrics and what affects them in reality there are only a few you really need to get a hold of and monitor. You just have to chose the ones that mean the most to you.

Example..... hours per ro or dollars per ro? Which one would you rather track and focus on? I can certainly manipulate one for the other.

jfuhrmad · June 15, 2017

I'm trying to identify leaks in my profitability. Things that don't always show up clearly in ARO or hours/RO. ELR is a great way to see where I might be missing dollars when it comes to labor. Or at least to understand and be comfortable with why I'm not billing 100%. That's all.

I'm in agreement that too many metrics can make business confusing, but for guys like me who are trying to understand and improve our businesses quickly, finding the right metrics to identify and solve problems is a big deal because, as young business owners we tend to have a lot of them. Finding 1% more profit in 2-3 areas is 3% more profit which adds up over a year and that means we can grow or buy new equipment or whatever.

Some people here have many years of experience and their shops have become very intuitive to them. Some of us don't have as many years so this can be a place where we can learn and get up to speed quickly.

A post like this is great for someone learning about ELR because it discusses what it is but it was missing what to do to fix it. Now, it has some actionable insight and is much more helpful.

Wheelingauto · June 16, 2017

Great answer. Yes, this is a place to discuss ideas and such and a great resource for management ideas.

i am one of those 30 year guys and have been regarded as a "numbers" guy. While I have been thru many many hours of training I cannot find much of a use for ELR. Really, if you wish to improve bottom line you can charge 2 for 1' that will impact elr. You can also start stepping on the labor guid. If it calls for one hour and you bump it from 1to 1.2 ( in dollars not hours) and correct the hours back down you will really impact elr. You stated above this was shorting the techs. I could argue it isn't but it's one metric over another.

I would focus on gross profit and expenses. Efficiency and productivity. If you still think there a % or 2 on the table raise the targets. Don, t change the measuring bowl.

AndersonAuto · June 16, 2017

On 6/14/2017 at 11:52 AM, jfuhrmad said:

I realize this post is 4 months old, but it I think this is the right place to post this.

What can be done to raise ELR if you have 100% on non oil change and tire ROs? We are almost always at 100% except oil changes and tires.

I've heard of shops with over 100% ELR. Are they just measuring it wrong or is it maintenance services or what? The only way I see to have over 100% ELR is to either short your techs, charge over 100% for diagnostics (very justified if you ask me) or have maintenance services where the packaged time is more than the time paid to the tech. What other ways could you raise ELR?

I think you may be a little confused about the definition of ELR. What you're describing is that you charge your full door rate on most services except LOF and tires. That's not what it means.

Effective Labor Rate is the result of dividing the billed hours by the technician into the charged labor dollars to the customer. Let's assume that your door rate is $112. If your tech flags 10 hours and you bill the customer $1120, then your ELR is $112, or 100% ELR. But, if your tech flags 11.5 hours and you bill the customer $1000, then your ELR is $86.95, or 77.63%. Always do this calculation from your books and payroll. As in, what do the books (not the management system) say that you collected in labor charges for the period in question, and how many hours did you actually pay the tech? It's really easy for the advisor to "forget" to add labor hours to the RO, but the tech flags the time. Or, if you pay the tech based on the hours shown in your management system, the advisor can add hours without adding dollars to the RO.

ELR is one of the fastest ways to check whether your advisor is giving away labor. If your ELR is way off, it doesn't point to the problem, but it shows you that there is a problem. Then you start auditing repair orders.

jfuhrmad · June 16, 2017

5 minutes ago, AndersonAuto said:

I think you may be a little confused about the definition of ELR. What you're describing is that you charge your full door rate on most services except LOF and tires. That's not what it means.

Effective Labor Rate is the result of dividing the billed hours by the technician into the charged labor dollars to the customer. Let's assume that your door rate is $112. If your tech flags 10 hours and you bill the customer $1120, then your ELR is $112, or 100% ELR. But, if your tech flags 11.5 hours and you bill the customer $1000, then your ELR is $86.95, or 77.63%. Always do this calculation from your books and payroll. As in, what do the books (not the management system) say that you collected in labor charges for the period in question, and how many hours did you actually pay the tech? It's really easy for the advisor to "forget" to add labor hours to the RO, but the tech flags the time. Or, if you pay the tech based on the hours shown in your management system, the advisor can add hours without adding dollars to the RO.

ELR is one of the fastest ways to check whether your advisor is giving away labor. If your ELR is way off, it doesn't point to the problem, but it shows you that there is a problem. Then you start auditing repair orders.

Thanks for the clarification. So, I did the calculation right I just did a bad job of describing it above. Basically, my ELR is not good, so I audited all of my ROs for May and found that every time ELR is under 100%, the job includes tires or an oil change. For example, I'll have a job where flagged hours is 1.5 but I'm only billing $110 in labor, and it turns out it was installing 4 tires plus an alternator. So my ELR there is 72%. (I used fictitious numbers there)

Otherwise my door rate x flagged hours = labor sales on every job. Given this, I believe my SA is not giving away labor. Certainly, could do better on maintenance and could write time for rusty trucks a little higher, but I don't believe we are giving away time.