Gross Profit Margin on Parts
In our last blog in the Profit Boosting Boot Camp series, we discussed your overall gross profit margin.
This time, we're taking a look at your gross profit margin on parts. Like the overall gross profit margin, this metric, too, allows you to track trends in profitability. Are they consistent, or are you still losing money on some jobs? Following your gross profit margin on parts lets you identify these places and make plans for future improvements.
Very similar to the overall gross profit margin, it's calculated in much the same way, except focusing in on parts: revenue from parts minus cost of parts, then divided by the revenue from parts.
This percentage is your gross profit margin on parts. It lets you know how much profit you're making from the sale of parts on the jobs in your shop. The graphic below illustrates this:
Raising Your Gross Profit Margin on Parts
There are quite a few strategies you can employ on your quest to improve your gross profit margin on parts. These include:
Streamline Your Parts Management System
Using an electronic database for your parts management system with a dashboard that allows for real-time updates can help increase the efficiency of your parts department and help you properly price your parts. It also helps you to better understand your various vendors and their pricing systems. Having parts priced accurately is key to improving your gross profit margin on parts.
Understand Profit Numbers by Manufacturer
This will help you make more informed purchase decisions, as you will better know where the best prices are for the various parts you need to stock. It will also help you better decide how many of a given part to order at a time, especially of high performing sales items.
Decide on the Margins You Need for Parts
It's important that you know how much you need to make on each part you sell and price them accordingly. Be systematic about this. Use a parts pricing matrix inserted into your parts management system so that it's accessible when you complete a sale. Making sure each and every part is priced according to the margin you need to make will help increase your overall profits.
Purchase Aftermarket Parts to Increase Margins
Looking into a quality aftermarket supplier, like HHP, can help increase your profits. Aftermarket parts often cost significantly less than their OEM counterparts, allowing for increased savings for you, as well as a higher profit margin. It's good to note as well that aftermarket parts can have just as impressive quality and warranty as those from the OEM.
Work with Vendors
Make sure that you are communicating with your vendors to get any possible discounts. Many have decreased costs for volume purchasing or preferred pricing for repeat customers. Check out our Repair Shop Value Program to learn more about our preferred pricing.
Understand Shipping and Pricing From Vendors
Take a look at the shipping procedures and availability from your vendors. Sometimes one may have a lower price, but that small savings won’t save you money in the long run if you're losing money due to repair delays. Be sure that you're getting the best price and the shipping time you need to ensure the repair work gets done in a timely manner. This will keep your customer satisfied and coming back, securing future profits.
Charge for All Parts
It might seem like a no-brainer. Who doesn't charge for parts? But it's important to make sure that even the small parts are being billed, including bolts and other seemingly unimportant parts that sometimes get thrown in for free. These small costs can add up, and by making sure you charge for them, you'll be surprised to see your profits grow.
Make Sure Your Markups Cover the Costs
This again might seem simple, but make sure the price you're charging the customer is actually indicative of how much it costs you to get the part to them and on their engine. This can prevent you from taking too much of a profit loss.
The infographic below summarizes these ideas:
For more information on maximizing profits in your parts department, be sure to check out our free white paper.
Some Things to Consider
As we mentioned in the previous post, be careful not to increase your markups too high. Yes, it's important to make money, but you also have to keep the customer in mind. Is your pricing still consistent with industry standards? You don't want to unintentionally drive your customers into the arms of another repair shop.
In March of 2014, Ratchet+Wrench published an article in which they spoke with a couple of repair shops on how they track their KPIs. One shop noted that markups might not be the same across the board. Doing this could actually cost you money in the long run. Instead, know what percent profit you need to make on each part and figure your markup accordingly. It's important to be familiar with the price structures of your vendors to help you decide on the proper markups.
While it might seem redundant to track both your overall gross profit margin and your gross profit margin on parts, focusing in on the specifics can give you a clearer picture of what's happening in your shop. This allows you to really note any problem areas, as well as things that have been working well, to better guide your shop to increased profitability.
In our next installment, we’ll look at another facet of your gross profit margin—the gross profit margin on labor.
Joining our Repair Shop Value Program can help you increase your parts profit margin. Learn more about the benefits here.