Understand parts markup

[Byron]

I have been overwhelmed with the amount of reading, number crunching, how many people live in the area, how busy the road traffic is, average income for a household on and on and on..... right down to my overhead costs, insurance, gas and electric, internet, paper etc....

 

Will you shop owners give some insight as to how you go about marking up prices on parts. For example should I be marking up my parts to cover my overhead only or should my parts and labor be included to make up for my costs of doing business and profit. Is there a certain program used to mark up parts or do you do it just from experience. I hear the term matrix used will someone please explain what that means and how they reach there mark up using a matrix formula. I know for parts that cost less you are able to do a bigger or better mark up. At what point then for the cost of a given part do you do less of a mark up and how much. I also realize in a given area when peoples income are higher parts can be adjusted to fit for that economic area. So I hope to get this part of doing business figured out and it is giving me some anxiety over learning all this and would rather get the knowledge now from experienced shop owners.

 

Thanks

Byron

 

 

 

[bstewart]

http://www.autoshopowner.com/topic/8991-pricing-markup-matrix-advice

 

That thread would be a good place to start. In the last post I included EXAMPLE parts matrices for aftermarket and dealer sourced parts.

As a shop owner, you ONLY make money on 2 things: labour and parts (labour being the larger of the two)

You absolutely need to make a good profit margin on parts to stay profitable as a business.

 

The "gold standard" for shops nowadays is to make 70% gross profit margin (GPM) on your labour and 50% GPM on your parts, for a total of about 60% GPM.

This will let you achieve 10+% net profit at the end of the year, which will pay for tools, training, building upgrades, bonuses, wage increases etc etc etc

Try to think more in terms of profit MARGINS rather then price MARKUPS, it will benefit you greatly.

 

Here is another thread which talks about the ratio of your labour to parts GPMs.

http://www.autoshopowner.com/topic/9381-labor-margin-vs-parts-margin

It contains a little more theory about your profit margins, but it should be a good read as well.

Edited April 18, 2014 by bstewart

[mmotley]

You absolutely need to make a good profit margin on parts to stay profitable as a business.

 

Cannot disagree more with this statement. It seems like there has lately been quite a few people who are obsessed with profit percentages, particularly on parts. I understand everyone wants to make money, and I know everyone sees profit on parts as free money. You buy a part, turn around, and sell it for more. But spending so much time worrying about percentages and matrices and discounts for 1 section of your business doesn't make sense. If at the end of the month, your OVERALL percentage is where it needs to be, who cares about your parts markup or whatever (within reason).

 

If you make 300% on a hose clamp and I make 20% on a transmission, who is going out to eat tonight? When you get your electricity bill, do you pay it with percentages or dollars? Instead of chasing a better parts discount, maybe you can look into better advertising to bring in more customers. Or perhaps send a few employees to do some sales training, converting more oil changes into big tickets.

 

Again, I understand how it is easy to get excited about selling some brakes pads for $50, when you only gave $20 for them. It just seems like there are a lot of guys obsessing about it and missing a whole other aspect of the business.

[Sean]

 

Cannot disagree more with this statement. It seems like there has lately been quite a few people who are obsessed with profit percentages, particularly on parts. I understand everyone wants to make money, and I know everyone sees profit on parts as free money. You buy a part, turn around, and sell it for more. But spending so much time worrying about percentages and matrices and discounts for 1 section of your business doesn't make sense. If at the end of the month, your OVERALL percentage is where it needs to be, who cares about your parts markup or whatever (within reason).

 

If you make 300% on a hose clamp and I make 20% on a transmission, who is going out to eat tonight? When you get your electricity bill, do you pay it with percentages or dollars? Instead of chasing a better parts discount, maybe you can look into better advertising to bring in more customers. Or perhaps send a few employees to do some sales training, converting more oil changes into big tickets.

 

Again, I understand how it is easy to get excited about selling some brakes pads for $50, when you only gave $20 for them. It just seems like there are a lot of guys obsessing about it and missing a whole other aspect of the business.

I couldn't disagree more with your disagreement. If you aren't getting proper margins on parts you are leaving money on the table IMHO. A lot of shop software programs calculate the margin and use a matrix to do so.

 

I do agree training is a good thing and management should be seeking training as well.

Edited April 19, 2014 by Sean

[carbtech72]

I have one tech My labor rate is $70/hr and he is paid $25/hr on flat rate. so my gross profit on labor is 64%. My parts mark up is generally 50% over my cost although for small and large items its different. I have pretty low overhead costs so on an average week we do pretty good. haven't got all the whole thing quite working perfect yet but there is always money left over after the end on the month so something is working

[bstewart]

 

Cannot disagree more with this statement. It seems like there has lately been quite a few people who are obsessed with profit percentages, particularly on parts. I understand everyone wants to make money, and I know everyone sees profit on parts as free money. You buy a part, turn around, and sell it for more. But spending so much time worrying about percentages and matrices and discounts for 1 section of your business doesn't make sense. If at the end of the month, your OVERALL percentage is where it needs to be, who cares about your parts markup or whatever (within reason).

 

If you make 300% on a hose clamp and I make 20% on a transmission, who is going out to eat tonight? When you get your electricity bill, do you pay it with percentages or dollars? Instead of chasing a better parts discount, maybe you can look into better advertising to bring in more customers. Or perhaps send a few employees to do some sales training, converting more oil changes into big tickets.

 

Again, I understand how it is easy to get excited about selling some brakes pads for $50, when you only gave $20 for them. It just seems like there are a lot of guys obsessing about it and missing a whole other aspect of the business.

I think you missed the point of my post, and focused on the one line that carried the least weight.

The OP was asking if he should be "just covering his overhead" with his parts margins, or whether he should be making money.

I simply explained the industry standards of profit margins, which is 70% on labour and 50% on parts, for an average of 60%.

 

I honestly agree with you that parts margins aren't everything, but they most definitely can not be overlooked either.

Like I said in my post, a shop only sells two things: labour and parts.

Not making any meaningful profit on parts would only be ok if you were making something like 78-80% on your labour ($140-150/hr shop rate on $30/hr techs), which I suspect 99% of shops aren't.

I even outlined this theory (higher labour margin & lower parts margin) in my other thread, which I linked to at bottom of my first post.

[Dee1234]

So is there a particular parts markup AND profit margin on labor we as shop owners should be trying to hit on each ticket?

[bstewart]

So is there a particular parts markup AND profit margin on labor we as shop owners should be trying to hit on each ticket?

In an ideal world, you would hit your target profit margin for labour and parts on each ticket.

Unfortunately the real world is not like that. Since each ticket is very different, you will have widely fluctuating profit margins from ticket to ticket.

 

On one ticket, you might sell a lot of small, higher profit items, like bulbs, clamps or filters. Your parts profit margin on this ticket might be a massive 80%, but you might only make a few dollars of actual profit on your parts.

On another ticket, you might sell a transmission, which carries a much lower profit margin (around 25-30%), but you would also make hundreds of dollars of actual profit on this ticket.

 

Therefore, you have to look at your averages over a period of time (daily, weekly, monthly) to find your "real" profit margin on parts.

The longer the time period, the more accurate the number will become, because it smooths out the fluctuations from ticket to ticket.

[GeeZ]

Hey guy and girls. Be careful about discussing pricing strategies on an open forum. The FTC takes a very dim view about this. I has been

construed a price fixing in other industries.

[mmotley]

Hey guy and girls. Be careful about discussing pricing strategies on an open forum. The FTC takes a very dim view about this. I has been

construed a price fixing in other industries.

 

All the more reason to stop marking up parts so much! Why should someone pay you double for a part just because you got it? Especially when you are getting parts right down the street from a store your customer can walk in to and get the same part.

 

If you make $1000 profit at the end of the day, does it really matter if it came from parts or labor? If anything, I would want more profit to come from labor than parts. Why? Because then I can argue that I don't mark up my parts like shop 'B' down the road. We live in a day of smart phone, tablets, amazon, and rockauto.com. If your customers know you get brake pads from Autozone or Oreilly and they see you double the price of them, of course they are gonna be mad! So why not just raise your labor up, lower your parts mark up, and keep the customer happy? And now your customers have no reason to try and bring in their own parts...

 

Why not just make 10%-20% on parts, and make 80%-90% on labor? I still cannot understand why some folks on here feel they HAVE to make large profit on parts. WHY???? WHYYYYYY? If I don't mark up parts and my ticket comes to $200 and you do mark up parts and your ticket comes to $200, the only thing you have done is created an opportunity for the customer to get upset about you marking up parts for more than what they can get them for (and depending on your state, increase in sales tax).

 

You can say I'm leaving money on the table, I say your getting your butt caught in a crack when the customer gets their invoice.

[Tires Too]

I agree with you mmotley. We quote prices for the job (brake job is $350). The customer is OK with the price until they pick up the car and see $220 for parts and $130 for labor, that's when they start to complain about the parts pricing. I know many shops do not break out parts/labor on their invoices and I have thought about doing that, but it feels like I am not being honest or transparent with the customer. I am seriously considering going to the pricing model that mmotley is suggesting. At the end of the day we still collect $350 for that brake job, now it's $250 for service and $100 for parts. Makes some sense to me. What do you guys think?

[bstewart]

Mmotley, do you follow this pricing structure in your shop? Would you care to share your actual gross profit margins on your labour and parts, and your parts:labour ratio?

My only question would be: Would you be comfortable posting your labour rate in your shop? Would your customers appreciate the "we don't mark up parts" argument if they could plainly see that your labour rate is $150 when all your competitors are around $100?

Like I said before, I agree with this idea, but right now it really is only an IDEA. I want to know if it's been done in practice, and what feedback your customers have given you.

 

Tires Too, I outlined my theory in this thread: http://www.autoshopowner.com/topic/9381-labor-margin-vs-parts-margin/

Perhaps you'd like to take a moment to read the thread, and maybe you'd be interested in putting the theory to practice and letting us know the results (your customers reaction)!

Edited May 2, 2014 by bstewart

[Tires Too]

bstewart,

Now that's the rub, I haven't worked up the testicular fortitude to implement that program yet. I've been throwing it out for discussion for some time, but have not really gotten much feedback from other shop owners or even my coaches at ATI. I'm looking for some input from others, should we hijack this thread or start a new one?

Russ

Edited May 2, 2014 by Tires Too

[bstewart]

bstewart,

Now that's the rub, I haven't worked up the testicular fortitude to implement that program yet. I've been throwing it out for discussion for some time, but have not really gotten much feedback from other shop owners or even my coaches at ATI. I'm looking for some input from others, should we hijack this thread or start a new one?

Russ

I asked for input from other shop owners in the other thread as well, but it seems that very few, if any, others on here have actually put this to the test and will share their results. (except maybe mmotley)

Maybe a good start would be, asking your long time customers what they would think of the idea. You could say that you feel it's more transparent to the customer, and the benefit would be that you wouldn't charge more then your local parts store.

See what their reactions would be. But also know, that if 5-10% of your "good" customers aren't complaining about your labour rates, they probably aren't high enough anyways.

[Tires Too]

I have been discussing it with some of my "A" list customers. They really do not care how we break it out on the invoice. They know they are paying for our "service" and they find value in what we do. Parts for free or for $250 doesn't really matter to them. I believe I can speak for the majority of shop owners in saying that we do not get much push back on our labor rates, but do hear about parts pricing, so why not change the dynamic on how we structure our profit model?

 

I've have a 20 group meeting May 21-22 and I'm going to bring it up for discussion again, I'll let you know what I get for feedback.

Russ

[bstewart]

I have been discussing it with some of my "A" list customers. They really do not care how we break it out on the invoice. They know they are paying for our "service" and they find value in what we do. Parts for free or for $250 doesn't really matter to them. I believe I can speak for the majority of shop owners in saying that we do not get much push back on our labor rates, but do hear about parts pricing, so why not change the dynamic on how we structure our profit model?

 

I've have a 20 group meeting May 21-22 and I'm going to bring it up for discussion again, I'll let you know what I get for feedback.

Russ

Excellent! This is exactly the kind of discussion I wanted to start!

I'll be waiting to hear what insight you come back with from your meeting.

[mmotley]

Mmotley, do you follow this pricing structure in your shop? Would you care to share your actual gross profit margins on your labour and parts, and your parts:labour ratio?

My only question would be: Would you be comfortable posting your labour rate in your shop? Would your customers appreciate the "we don't mark up parts" argument if they could plainly see that your labour rate is $150 when all your competitors are around $100?

Like I said before, I agree with this idea, but right now it really is only an IDEA. I want to know if it's been done in practice, and what feedback your customers have given you.

 

I wouldn't mind sharing my numbers. I will post them up tonight after work has slowed down for the day. However, know that I am a small shop. I am not a shop with 7-10 mechanics, a receptionist, and 2-3 service advisers. It's just me and 2 other guys.

 

I implement what I discussed loosely. I have a price matrix built loosely around the discount I receive.

I.E. Sometimes after I mark a part up, I still sell it for less than what a customer can buy it for. Other times, after it runs through the parts matrix, I sell it for a little over what the customer could go buy it for. In some cases where the price goes over retail, I bring it back down to match the regular 'walk-in' price (just case by case, depending on the job, how I feel, the customer, etc.) Let me be clear, I am not referring to 'list price.' I know that list is not what a regular customer pays. I get 2 prices before I try to sell parts: My discounted price, and the regular prices (NOT LIST). I will post up some actual figures from last month later on, and maybe a few specific examples.

[Tires Too]

Thanks mmotley, It'll be interesting to think outside the box a little bit.

[mmotley]

Numbers are for last month:

 

Parts profit - 25.47% (maybe a little bit higher due to flat rate pricing on some jobs (i.e. I charge the same for all brake pads, regardless of what they actually cost, same with timing belts))

 

Labor profit - 79.95% I fudge this number a little due to the way I pay my help, but it consistently runs 70-90%. The busier I am, the higher the profit percentage since my help is paid hourly, not commission.

[mmotley]

I agree with you mmotley. We quote prices for the job (brake job is $350). The customer is OK with the price until they pick up the car and see $220 for parts and $130 for labor, that's when they start to complain about the parts pricing. I know many shops do not break out parts/labor on their invoices and I have thought about doing that, but it feels like I am not being honest or transparent with the customer. I am seriously considering going to the pricing model that mmotley is suggesting. At the end of the day we still collect $350 for that brake job, now it's $250 for service and $100 for parts. Makes some sense to me. What do you guys think?

^^^^^^^^^^^^^This right here^^^^^^^^^^^^^^^

 

Perfect example. Customers usually won't argue about how long it takes to do a job, or ask you to justify why your labor rate is what it is (if they do, you should probably have some ASE's hanging on the wall or other certs to justify). But you better believe people will price shop parts. Especially when you are getting them from Napa, Oreilly, Autozone, or wherever down the street that they can get them from too. Plus, if your state doesn't require you to tax labor, you can argue that you are helping out your customer by keeping parts prices as low as possible to help them avoid taxes!