The most effective pricing strategy for parts is much like it is (or should be) for vehicle sales. It is structured to provide a balance between Gross Profit % and volume by pieces or units. It does no good to sell only a few parts to attain a high GP% unless you’re out to impress your 20 Group instead of improving your bottom line. Similarly, it is equally useless to achieve high volumes with loss leaders or with sub-standard margins simply to impress the factory by selling for MSRP or achieve further purchase discounts which you end up giving away anyway. The best solution is one which blends them to provide high unit sales with good average retained Gross Profits.
Matrix Pricing 101:
The traditional approach to improving Gross Profit margins has been to implement some form of Matrix Pricing. This originally came into popular use when manufacturers began reducing the difference between Cost and MSRP, much like they have with vehicles. Dealers seized upon various forms of this practice to recover lost revenue until it became excessive in many markets, causing a backlash from customers and a subsequent rise in sales from the aftermarket. Like anything else, too much of a good thing eventually became a bad thing. The original premise was to greatly increase the mark-up on lower priced items. This assumed that customers would not take notice since the actual dollars generated would be relatively small at that level. NOT!!! This tended to create better reports than actual revenue, so the price breaks that were matrixed grew ever higher until every level was bumped to some degree. The DMS providers aided and abetted this practice by offering the ability to have as many as 100 price break groups, and consultants quickly followed with “guaranteed formulas” designed to achieve astronomical levels of profits for the end users. The issue with these was that none of them considered the dealership’s actual sales profile, and most did not distinguish between competitive and captive parts. One Size Fits All thus became the norm, and once again the aftermarket welcomed our customers with open arms and cash drawers.
The simplest approach is to throw out the complex matrixed multiple price levels and apply a single cost plus factor to everything. This applies the multiplier evenly across the entire population of numbers being sold and, depending on the aggressiveness of the factor, will generally produce the desired results with fewer complaints or rejection by customers. The issue with it is that no accommodation is made for parts that have aftermarket competition, and the end result is often lowered piece sales on these items and reduced actual revenue. The GP% penetration usually meets the objective unless you experience substantial re-pricing (discounting) on the part of your sales staff as a reaction to rejection by the public. This is often the first sign that your multiplier is too high, and you must look to see if only certain parts groups are experiencing this. An analysis of these transactions typically identifies competitive parts that never should have been matrixed in the first place. The unfortunate part of this is that the same analysis will generally show that the discounting required to make these sales has probably resulted in a lower GP% than if you had been market competitive in the first place.
Another effective approach involves Price Averaging. In its basic format similar parts are grouped together and a common cost per unit is determined by a sales weighted average. That average cost-per-piece is now multiplied by the factor necessary to achieve the desired GP% for the entire group of part numbers. In some cases, prices will rise on some parts, and fall on others, but on a sales weighted basis they will achieve the desired target margin for the group. That target margin may differ depending on how competitive that group is. As an example, Air Filters may be more conservatively priced than Brake Rotors. This is done because the public generally has a better idea of what an Air Filter should cost than the Rotors. This is the process that we use when constructing Maintenance Menus for our clients.
There are other advantages to Price Averaging besides Menu Pricing. It’s a lot easier for Service Advisors to sell something when they can quickly and accurately quote an installed price for commonly sold parts. The time it takes to shuttle the customer back and forth between parts and service to get a final price is the main reason why Service Pricing Guides came into being by the DMS providers. You can achieve higher unit sales by simply having accurate and competitive prices available on demand. Since management hopefully has done the research before pricing is set there should be little, if any discounting if it was done properly. This goes a long way toward improving the GP%. If the prices have been set to market standards then the sales volume should go up as well since customers will have little reason to refuse a job, at least as far as parts price is concerned.
Finally, there is a place for a multilevel Matrix in the overall plan, and we recommend one called the Bell Curve. It eliminates the $5 bolt and $10 Light Bulb by only focusing on repair parts in the mid to upper cost ranges where they will generate real income.
The more pieces you sell at your target retention the more revenue you will have to pay expenses and end up with more net profit at the end of the month. Remember, it takes both volume and margin to generate the revenue you need to be profitable.
Written by Jim Richter