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The Power of Parts Margin/Mark-up for Independent Auto Repair Shops – Most Shops Are Leaving Tens of Thousands of Dollars on the Table

In the dynamic landscape of independent auto repair shops, every decision counts towards the profits, sustainability, and growth of the business. Over the years, I've witnessed firsthand the challenges and opportunities that come with running a repair shop, and I've dedicated myself to helping shop owners unlock their full profit potential through strategic parts markup as part of a strategic plan. In this comprehensive guide, I'll take you through my journey, share insights on parts markup, and explore the transformative impact it can have on the automotive service and repair business.

 

A Passion for the Automotive Industry:

 

My journey in the automotive industry began at a young age, working alongside my family in our repair business. From learning the ins and outs of maintaining and servicing a variety of vehicles to managing the day-to-day operations of the shop, I developed a deep appreciation for the complexities of the automotive industry. As I transitioned from a technician to a service advisor, and later a manager, owner, and leader, I realized the critical role that parts markup plays in shaping the financial health of a repair business, which can contribute 30% to 50% of your gross profit. Get this: from a survey of 618 auto repair shops, 67% of them are not maximizing their profit potential due to inadequate markup practices on parts, which is costing auto businesses between $40,000 and $70,000+ annually – a major hit to their top and bottom line.


A parts markup matrix is a strategy-based formula for pricing parts. It guides the markup on purchased parts to ensure a healthy profit margin on every repair order. It typically applies higher markups on lower-cost parts and lower markups on higher-cost parts to achieve a targeted overall margin.

Understanding the Parts Markup Puzzle:

 

For me, parts markup is more than just setting prices – it's about striking the perfect balance between profitability and customer satisfaction. Parts markup and the need for repair shop owners to adopt a strategic approach to pricing is important to running a financially successful business. By understanding costs, market dynamics, and customer perceptions, shop owners can ensure a reasonable profit margin while remaining competitive in the market.


Implementing a customized parts markup matrix is essential for profit, as standard list prices or flat markups won’t achieve healthy margins. This strategy ensures prices align with your services, protecting margins and enhancing profitability.

Cracking the Code: Practical Markup Strategies:

 

It is important that you understand both your profitability and costs to have a comprehensive pricing strategy. From setting realistic profit targets to developing structured pricing matrices, The Institute provides shop owners with the tools they need to maximize profitability and build value for their clients. Continuous monitoring and refinement of markup strategies are essential to staying agile and responsive to market trends. Typically, a shop marks up parts in one of three ways:

 

1.        Doubling Parts Price: What we see in shops with this strategy is a 42% to 44% parts margin.  This strategy is limiting and will NEVER get you what you need financially. The reason why is that it is not feasible for larger components such as engines. Most shops have no problem doubling a $4 oil filter to $8 but is virtually impossible to sell a $4,000 engine for $8,000. And you can never earn 50% margin with large items at 20% to 30%. 


2.        Dealer Mark-up/Manufacturer’s List:  What we see in shops with this strategy is a 38% to 42% parts margin.  The typical mark-up percentages applied by dealerships and/or manufacturers have nothing to do with your costs or the parts margins you need to be financially successful.   These mark-ups usually fall within the range of 30%-40% parts margin where we aim for 58%.


3.        Have and Manage a Parts Matrix (the best and only real option for successful shops):  By adopting and adhering to a consistent, non-emotional parts matrix, repair shops can navigate the complex landscape of parts pricing with confidence and purpose. If we are shooting for a 58% parts margin (55% minimum), the average repair shop doing $650,000 in gross sales would see parts sales totaling near $325,000 (@42% parts margin) creating a $114,660 parts profit. While a shop with a @58% parts margin would create a $188,500 parts profit making a difference of $73,840 in top-line revenue.

 

The most effective and reliable approach to parts pricing involves establishing and managing a structured pricing matrix or matrices. By removing emotion from pricing decisions and considering factors such as supplier costs, desired profit margins, and market dynamics, repair shops can consistently achieve margins within the desired range. This method ensures a balanced approach to pricing that optimizes profitability while maintaining competitiveness.

 

Exploring the Mechanics of Parts Markup:

 

Let's delve deeper into the mechanics of the parts matrix. The matrix is a structured framework that guides pricing decisions by considering key variables such as cost, desired profit margins, and market dynamics. By understanding these variables shop owners can make informed pricing decisions that align with their business goals.


This is a sample matrix from The Institute for Automotive Business Excellence that you can use as a starting point to mark up your parts. Use the strategy guide below this matrix for tips to adjust it based on your unique shop.

The Cost of Neglecting Markup Optimization:

 

Imagine a scenario where a repair shop consistently undercharges for parts in a bid to attract more customers. Initially, this strategy might seem like a win-win – customers are delighted by the seemingly affordable prices, and the shop enjoys a steady influx of business. However, beneath the surface lies a ticking time bomb. By undercutting parts prices, the shop unknowingly sabotages its profit margins, limiting its ability to invest in crucial areas such as equipment upgrades, facilities, employees, and employee training. Moreover, the perception of 'cheap' parts may tarnish the shop's reputation, eroding trust and deterring potential customers who equate low prices with inferior quality.

 

Unveiling the Profit Potential:

 

But fear not, for amidst the challenges lies a golden opportunity – the untapped potential of parts markup. By adopting a strategic parts matrix, repair shops can unlock a treasure trove of hidden profits and secure their foothold in the competitive market. Enter The Institute and Cecil Bullard, a seasoned veteran in the realm of auto business, who advocates for a paradigm shift in how shops perceive parts pricing. According to Cecil, the key lies in embracing the concept of value over price – educating customers about the benefits of quality parts and positioning the shop as a trusted provider of reliable solutions.


Important Tip: Leave Emotions Out of Parts Pricing - Don’t let emotions or customer concerns over costs deter you from standing firm on your parts markup. Your shop adds high value to the parts through warranties, guarantees of fixed vehicle issues, proper fitment, and expert installation —  justifying your worth.  Consider taking a sales class to identify your unique sales proposition (USP) and reasons for pricing higher than competitors or online stores. Recognize the value you offer. Practice your USP to build value for your clients and present your prices confidently.

Conclusion: A Roadmap to Success:

 

By embracing the principles of value-based pricing, continuous improvement, and customer-centricity, repair shop owners can chart a course toward sustainable growth and prosperity. With the right mindset and strategies in place, repair businesses can unlock their full profit potential and thrive in an increasingly competitive market. My story is not just about parts markup – it's about empowering repair shop owners to realize their full potential and succeed in an ever-evolving industry. With dedication, determination, and the right guidance, repair businesses can overcome challenges and achieve lasting success in the dynamic world of independent auto repair.


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Watch the webinar recording here: https://youtu.be/obqNwcux8mQ 

 

Created in Partnership with PartsTech


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