You make money in your business by selling only two things: parts and labor, nothing else. In this article we will be looking at how to make more on the parts side using the Price MarkUp Matrix.
Other Industries Use Price MarkUp Matrix
Like many other industry trainers and coaches, I teach all my clients and students to have a goal of making an average of 60% margin on their parts sold. You might already be saying “I can’t mark my parts up that much! No one will buy from me if I do!” My response is “Many other shops are using the 60% target and are selling more and profiting every day.” You can do this. If you choose not to increase your margins on parts, then you will have to increase your labor to make your profit goals.
Every business uses a pricing matrix of one sort or another. It could be structured, unstructured, strategic, seasonal, circumstantial, simple, complicated, or a mixture of these.
Grocery stores use a strategic matrix: they sell a high demand item like milk (average profit is .08/gal) as a loss-leader and make much more on other items to make their profit goals. This is why the milk is always in the very back of the store, so the customer will pick up other needed items in their way to the check stand.
Seasonal items get a higher mark up during peak demand. This applies when there are fluctuations in availability of and demand for a product, as well.
Automotive Approach to Price MarkUp Matrix
For the automotive industry, a popular simple structured approach is used.
I have visited well over 10,000 shops and many are not making the money on the parts that they should be. First, many don’t have a goal nor are they tracking their margins properly, if at all. Many just double the cost of the part for the sale price (a 50% margin). Others use a single set margin that is much lower than doubling the costs, while others just charge the list price on everything and have no clue what their margin is on parts.
The result of any of these strategies? The shops struggle to show any decent profits.
I must confess, when I had my first shop, I just doubled the cost to get the sale price. But I was challenged by slim profits until I attended a workshop on shop profitability and learned to use a matrix. I used a structured matrix to price my parts or used the list price if it was greater than the matrix. My profits soared!
What Should You Do?
Set a goal of 60% parts margin, start using a structured matrix and track your results.
The Mitchell1 ManagerSE has a Price Matrix built in. Like many of the Mitchell1 shops I have visited, you may have looked at it long ago or not at all, and it is still set at the 50% default for everything. You will find it by going to Configurations > Standard Tables > Price Matrix tab.
The idea of this matrix is to have a descending mark-up from the lowest cost to the highest cost items. For instance, you have a $1 cost item set to be marked up to sell at $3.50. This will have a much higher margin than 60%, but that will offset the less than 60% you would get on a very high-priced part like an ABS unit or cylinder head. Few customers will discuss the price of low $ items where you make the highest profits and sales volume.
When you start using the matrix your profits will improve immediately and immensely. One thing you will discover when you look at your P & L: your parts margin may not be at 60%. It could be higher, but most likely lower. Why? The most likely cause is parts slippage. There are lots of items you never charge for and should (cleaners, sealants, O-rings, bolts, washers, etc.) or forget to charge for. You should be charging for all the items you use/install on the vehicle like the ones I just listed. And to make sure that every part installed gets on a work order, set up some systems to see that they do. Using the Catalog buttons really help. Some shops clip every part invoice to the RO to make sure they bill for every part.
Would you like to get a copy of my suggested Matrix?
Want to have discussion about pricing strategy?
Or maybe you would like a quick review of your business numbers (KPIs)?
You can email me at [email protected] or give me a call at 408-221-1165 to schedule a call for an up to 30 minute no obligation session.
Author: 1 Week 1 Thing
Jeff is an automotive consultant with ESI Training who provided this shop tip. Reach out to your Local Mitchell1 Rep for Mitchell1 software.
