Implementing a parts matrix, managing productivity and aiming high are key factors for collision repair shops looking to increase their profit margin for parts.
“Parts margin is really easy to fix because parts margin is almost always just about pricing,” Cecil Bullard, founder and CEO of The Institute for Automotive Business Excellence, said during an Aug. 20 webinar hosted by the Automotive Service Association.
Bullard gave the example of two multi-shop owners (MSOs) in Minnesota. One MSO gets about a 48% parts margin, and tells him, “’Cecil, you don't understand; in Minnesota, you can't get 58% on your parts margin. You can only get about 52,’” Bullard said. “So, they routinely get 48%, because they're not shooting for 58%. They're shooting for 52.”
The other MSO routinely earns a 58%-62% parts margin. The nine miles separating the shops, and their proximity to Minneapolis and St. Paul, are less consequential distinguishing factors than the shop owners’ belief in their ability to grow profit, Bullard said.
Central to believing in the possibility of a higher profit margin is knowing that price is one of nine things the average customer considers when choosing a repair provider, he added. Quality, speed and convenience are three of those factors.
In addition to aiming high, establishing sound price matrixes is a core driver of higher margins.
Price matrixes with customized, preset markup and profit margin fields can help expand companies’ earning potential, Bullard said.
Markup refers to the multiplier shops use to get to the selling price, while margin refers to the difference between what shops bought it for and what they sold it for, he added.
On any part, the lowest margin that Bullard would advise companies to accept, depending on the part’s value, is 40%, he noted.
“One of the things that we have to consider is that as cars are becoming more sophisticated, we're replacing parts that are more expensive,” Bullard said. “That's why we need to make adjustments to our matrix to make sure that, overall, we get probably at least 55% on our parts, even though we're shooting for 58.”
Higher-priced items like engines and head gaskets that exceed $1,000 are the only parts where Bullard is willing to accept a margin as low as 40% or 45%, he said.
Finally, managing productivity comes into play in several situations. One could be where shops offer labor rates for certain services at lower amounts than the standard rate, according to Bullard.
“I do pay my techs for doing inspections and I don't charge my customers” could be one example, he said, and another example could be comebacks.
“When I add the free stuff in or the stuff with no profit into it, then it brings my effective labor rate my from my position of $130 to $108,” Bullard said.
There’s a relationship between productivity, labor cost per hour, and labor profit, he noted.
“If I pay somebody eight hours and they're there eight hours a day, and they're only billing six hours, that's 75% productivity,” Bullard said. “My labor cost per hour is going to go up dramatically and my labor profit is going to come down.”
Brian Bradley