Many dealership parts departments do not have a defined strategy for maintaining a specific gross profit percentage. The current industry guide for repair order parts gross profit percentage is 40% to 45%—this percentage is also recommended as a minimum by M5. Because of a lack of strategy, many parts departments are below this standard. Also, many states now have laws that state the warranty parts reimbursement on factory claims must be at customer pay parts pricing, creating a whole new focus on this component of our business.
The most common causes for performance below the industry standard are:
- Reduced margins due to the implementation of maintenance menus, competitive pricing of high-visibility parts such as brakes, bulbs, etc.
- Good-guy discounts.
- Pricing efforts or adjustments for misquotes.
- The computer representative has set up a standard set-up in a simple form to get the job done, and the manager has accepted this as the way to do it.
- Dealership executive management or parts management who are not aware of industry standards.
- The parts manager does not have the knowledge to implement an effective matrix strategy. In many situations, the parts manager has an idea about the simplest set-up in the computer but may not have the knowledge to use the computer to its maximum potential.
- The parts manager has never taken the time to become intimately familiar with the system manual or has not asked questions of systems analysts.
- The parts manager has not asked for help.
- The parts manager may not believe there is a need to make changes.
II. Developing a Repair Order Parts Pricing Strategy
A good repair order parts pricing strategy goes a long way in addressing substandard performances relating to gross profit percentage. The steps for developing a good pricing strategy are as follows:
- Determine the gross profit percentage goal.
- Conduct test pricing calculations.
- Determine the pricing strategy.
- Test part numbers under the current pricing strategy.
- Print a copy of the current matrix or pricing specifications.
- Review the computer manual.
- Determine the matrix technique and mark-ups.
- Cost average maintenance parts.
- Create sources for parts excluded from matrixing.
- Communicate regarding pricing policy changes.
- Create the matrix and enter it into the computer.
- Evaluate the pricing of the new test repair order.
- Manage the pricing strategy.
These steps are described in detail in Sections B. – N. below and in future newsletters.
B. Determine the Gross Profit Percentage Goal
When making changes to pricing policy and procedures, the dealer and parts manager should decide and agree on the goal for repair order parts gross profit percentage. The need for change may surface through the dealer’s involvement in a 20 Group, discussions with manufacturer representatives, or recommendations from a consultant during an in-dealership consulting visit.
C. Conduct Test Pricing Calculations
If the dealer decides that change must take place, the parts manager must have a basic understanding of the mathematics required to determine necessary selling prices. For example, a dealership’s gross profit performance is 37%, and the dealer has determined that 42% is the required benchmark:
- The example part costs $21.38.
- Subtract 42% from 100%. The result is 58%, which is the cost of the part.
- Divide $21.38 by 58%. The result is a sale price of $36.86.
Once the parts manager has this knowledge, the process can proceed.
D. Determine the Pricing Strategy
At this point, a strategy for parts pricing must be developed.
A good strategy is to break parts pricing into three distinctive groups:
- Pre-priced competitive parts—These items are easily compared and advertised in the marketplace by aftermarket competitors. Usually includes parts such as spark plugs, oil filters, oil, automatic transmission fluid, antifreeze, fuel filters, etc. Many of these items can be found in the maintenance schedules of an owner’s manual or on dealership service maintenance menus.
- Common maintenance or light repair parts—As a rate, these parts can be marked up approximately 145% and remain competitively priced. Parts in this category are those used for operations easily performed by competitors, such as brake jobs, tune-ups, exhaust work, shocks, struts, etc. The parts department should record these parts’ prices in a pricing guide. The parts manager can also set these parts in special sources on the computer. The parts manager should ensure they are usually updated according to departmental pricing policy and not updated by a monthly price master update in the computer.
- Repair parts—These are the so-called “hard parts” in the industry. Some common items are internal engine parts, wiper motors, electronic parts, gaskets, OEM-only fasteners, gears, trim parts, or captive parts of any kind. The pricing of repair parts should follow the matrixing set-up in the computer. At times, it could be possible for the parts manager to move certain parts from one category to another based on the competitive nature of the jobs being done. Caution should be exercised when making such moves.
E. Test Part Numbers under the Current Pricing Strategy
Before making any matrix revisions, the parts manager should conduct a price test of part numbers under the current pricing strategy for comparison with a subsequent test involving the matrixing set up in the computer.
Several part numbers with different dealer costs should be selected for this test. Start with low-cost parts and progress to higher-cost parts. Choose a range of powertrain parts available only from the manufacturer. Choose other part numbers from competitive sources (e.g., Motorcraft in a Ford dealership or AC Delco in a GM dealership). The reason for captive and competitive categories is that the manufacturer sometimes has varying markups depending on the nature of the part.
F. Print a Copy of the Current Matrix or Pricing Specifications
Open a test repair order to invoice the tested parts and enter the test numbers before any revisions in the matrixing. Print a copy for review when the matrixing is complete and then void the repair order. The parts manager will need this information later to determine how the matrix changes have affected the initial sales prices.
It is wise to have a copy of the original pricing set-up to accurately determine the department’s prior position in the event the manager wants to make a comparative analysis once the changes have been completed.
G. Review the Computer Manual
A review of the computer manual’s pricing matrix section is recommended before attempting to implement a matrix. The set-up procedures must be reviewed to determine the way to implement the changes.
It is not unusual to find parts managers with little or no knowledge of the computer’s capabilities. In fact, the manager might say that it cannot be done.
In making the initial changes, the manager and/or consultant may need to contact the computer vendor for additional help.
H. Determine the Matrix Technique and Mark-ups
Sometimes, what management calls a matrix may not be a matrix. It may be a set-up that sells everything at the manufacturer’s suggested list price. Other quite simple versions of an attempt to be creative may be a set-up of a list plus 10% on everything or a sales price that doubles the cost price for everything.
The matrix can be intricate if the manager has been a student of matrixing and possesses some creative talent. The most common setup is straight list price or list plus a percentage.
There are various matrixing techniques, from simple to complex and from customer-sensitive and non-sensitive.
- Single-Level List Price Manipulation
A single-level list price manipulation is a way to improve performance. For example
, this type of matrixing could be implemented at 5%, 10%, or 15% above the manufacturer’s list price. This type of matrix is not customer-sensitive in that everything is marked up over the list. This means that the suggested list price will be inflated for the hard parts and the competitive parts. This can be harsh when expensive parts are purchased.
- Cost Doubling
Another uncomplicated way is to double the cost of everything. This type of matrix can have a positive effect on gross percentage. However, this type of matrix effort can be bad for the dealership in a couple of ways. First, everything will be double costed. Imagine a $250 cost part with a normal suggested list price of $419. If double costing is applied, the selling price is $500. While this is good from a gross profit percentage aspect, an $81 jump over the suggested list might cause a negative customer reaction. With some part numbers, it is possible for the parts department to sell parts with liberal manufacturer markups from cost to list at a selling price below the manufacturer’s suggested list price.
- Variable Percentage Mark-up
The next approach is one often used by M5 consultants. The matrix uses a variable percentage mark-up applied to the parts dealer cost or list price. An example of this approach is a part costing between one cent and seventy-four cents priced at cost times 175%, the next range is seventy-five cents to $1.25 at cost times 170%, etc.
This type of matrixing is very versatile. The multiplier is reduced as cost prices increase. This allows for extremely good percentages with lower-cost parts. The gross percentages decrease as the parts increase, but when a high-cost part is needed, the service department is more likely to make the sale without a lot of customer resistance. This approach works so well because lower-cost parts are needed far more often than higher-cost parts.
An effective way to use this approach to its highest level is to:
- Create separate sources and prices for maintenance parts.
- Create sources for parts considered to be customer-sensitive.
- Create separate sources for accessories or any categories in which the dealership wants to be more competitive.
In some dealerships, parts such as AC Delco or Motorcraft may already be in a separate source. The dealership may choose to create separate sources to control the sales price of certain categories, such as remanufactured engines.
I. Cost Average Maintenance Parts
To properly address customer-sensitive maintenance items and use service maintenance menus, the next logical step is to employ cost averaging for maintenance parts pricing. Mass merchandisers and auto parts stores use this approach. Parts displayed in these stores, such as oil filters, air filters, spark plugs, and many other maintenances and/or competitive items, have one price.
For example, all oil filters might be $3.95 and wiper blades $5.95. This technique allows dealerships to make quick quotes at the point of sale and allows simplicity in developing a service menu. The technique determines the average cost of each categorical part based on acquisition cost and sales history.
The following steps detail how the technique works:
- List parts on a form by category, such as spark plugs on one page and fuel filters on another.
- Necessary information is as follows for each part or the number of times it has sold in a pre-determined period:
- Part name
- Part number
- Item cost
- Sales history
- Determine the cost average or sales-weighted cost by completing the following steps:
- Multiply the cost of each part by the number of sales to determine the total item cost.
- Total the number of sales for all the parts within the category.
- Determine the complete category total item cost by adding the total item cost for each part number.
- Divide the total cost of all items by the total number of sales to determine the sales-weighted cost of parts within the category.
- According to the part, its competitiveness, and dealership requirements, a one-price sales price is determined for the item by multiplying the sales-weighted cost by the mark-up factor.
- For example, for each spark plug: $1.40 (sales-weighted cost) x 1.50 (150% mark-up factor) = $2.10 (selling price)
- There may be exceptions if a part is much higher than others within the category.
- The parts and service managers should practice excellent communication to ensure that the parts department addresses the needs of the service department regarding menu pricing.
- As labor operations such as maintenance services are set up for menu pricing, some computer systems may have the flexibility to include parts pricing if the department has arrived at a single price for each item.
J. Create Sources for Parts Excluded from Matrixing
Management will not want to use the matrix for all parts. Additional sources will be needed to control the selling price of specific parts in several categories. According to the dealership, computer system, and manager’s previous work with matrixing, some additional sources may exist.
The sourcing setup specifications in the computer should alert management and/or a consultant to existing alternate sources. When all current sources have been identified, it may be necessary to create alternate sources for parts that will be excluded from the standard matrix. Examples of alternative sources are maintenance parts, competitive parts, special pricing sources, etc.
A decision must be made for appropriate pricing for each source. This can usually be accomplished from cost or list. An example might be the list price on an engine and 10% off list on brake pads. Some computer systems allow sources to be entered that will not update the price unless the manager does so manually. This is an effective way to set up maintenance parts that are used on service menus.
This usually does not encompass a tremendous amount of part numbers. The parts manager or delegated employee should review these part numbers for updating the cost price, but the selling price should never be adjusted without the agreement of the service manager. If the selling prices are adjusted, service advisor quotes from service menus will not be accurate and could cause customer relations problems as well as internal problems in closing repair orders.
K. Communicate Regarding Pricing Policy Changes
The service manager and parts manager should periodically work together to revise menus, as necessary. Menu revisions should never be completed without conducting a market review of mass merchandisers and tire stores in the area to ensure that menu prices remain competitive.
Management has a responsibility to meet with parts personnel to inform them of changes in pricing policy. A written memo or policy establishes the rules of the policy and should be used as a tool if employees fail to follow the policy.
L. Create the Matrix and Enter into the Computer
The matrix must be created and entered into the computer. To get a feel for the impending changes, the parts manager can make manual calculations for example parts printed on the test repair order described in Section E. above. The matrix can be aggressive or conservative in response to the need for improvement and market conditions.
Once comfortable with the markups, the matrix can be created on paper and entered into the computer.
M. Evaluate the Pricing of the New Test Repair Order
Testing must be performed after the matrix is entered into the computer. Use the same part numbers that were printed on the test repair order described in Section E. above for comparative analysis.
Determine the gross profit percentages by dividing the cost prices by the selling price. Ensure that pre-priced competitive parts and common maintenance parts are excluded from the matrix and are priced as desired. Make matrix adjustments if necessary. Ensure that
repair orders and retail counterparts’ invoices are printing identical prices.
Every effort must be made to ensure that pricing is always consistent. The prices should match menu pricing guides and employee quotes. There should never be any deviation in the policy without management approval. Use common sense to move some matrixed parts to a lesser-priced category when appropriate. It is never advisable to inflate the list price of menu items, customer-sensitive parts, and parts that are heavily advertised.
The Robinson-Patman Act of 1936, an amendment to the Clayton Act of 1914, technically prohibits retail pricing inconsistency. Most people are not aware of this law, so there is negligible risk of legal action. The real risk is the loss of credibility with consumers if pricing inconsistency occurs.
N. Manage the Pricing Strategy
It is important to inspect what you expect. To ensure pricing policy concurrence, the parts manager should:
- Review day-end reports for gross profit percentage.
- Review any computer exception reports.
- Review repair orders, as necessary.
- Counsel any employees violating pricing policy.
- Review the daily DOC sheet to determine percentage movement.
The expected result from implementing a repair order pricing strategy is to improve gross profit. Adjust, as necessary. Let the newly-created matrix run for several days before making adjustments to let the changes settle in and form a new picture of what the day-to-day percentage will be. Management must follow up to ensure the continuance of pricing policy concurrence.
All dealerships need a defined repair order parts pricing strategy to logically achieve dealership goals. The dealer must communicate the dealership’s goal to the parts manager. The parts manager must follow an approach that will achieve the expected results. Knowledge of necessary mathematics and the computer’s matrix ability is essential. The steps covered in this document are intended to provide a step-by-step road map for successful pricing implementation.