Three Simple Strategies to Grow Profits in Your Parts Department

by Ken Rock, Corporate Training Manager, Auto/Mate Dealership Systems

As published in the August 2015 issue of Service Drive Today.

Does your parts department consistently sell parts at the Manufacturers’ Suggested Retail Price (MSRP)? If the answer is yes, you’re losing out on thousands of dollars in potential profit every year. When I give training sessions to parts managers, I teach the following three pricing strategies that instantly start adding profits to the bottom line. Though the profit per item is small and not even noticeable to your customers, over time these incremental profits add up.

 

If your parts department follows these recommendations, in one year profit margins could increase by MORE THAN fifty percent. I’ve seen it repeatedly with our customers, and there’s no reason why your dealership can’t benefit too.

 

Matrix Pricing

 

Just about every dealership management system (DMS) has this feature available but not every parts department is using it. Matrix pricing is a system where you take a part’s initial cost and multiply it by a certain amount to come up with the selling price. The lower the cost of the part, the higher the multiplier. For example, for parts that cost 1 to 10 cents, I recommend a mark up of 975 percent. I know that sounds like a lot, but if a part costs 10 cents, instead of selling it for the MSRP of 18 cents, the matrix price would be $1.18. Not so outrageous, and on a repair order (RO) the amount is downright negligible.

 

For this reason matrix pricing should only be used on parts sold to the service department for ROs. It should never be used for over-the-counter parts sales! The Internet has made parts pricing so transparent that a customer can easily use their smartphone to look up a price. When you sell parts over-the-counter, stick to MSRP. But on ROs, customers rarely question pricing on parts and if they do, the total amounts are such a small percentage of the overall RO they shouldn’t raise any red flags.

 

As the cost of the parts rise, the markup percentage drops (see table). Typically I recommend capping matrix pricing at $20. Any part that costs $20 or more, revert to selling it for the MSRP. Also, matrix pricing shouldn’t be used for all parts, such as oil filters, because prices for those are pretty standard.

 

Matrix pricing is a quiet, gradual method for growing profit margins on smaller parts. It may take a year to realize the impact to the bottom line. I’ve worked with many parts managers to implement matrix pricing and, on average, this strategy alone can produce an increase in parts department profitability of fifty percent.

 

99 Cent Round Up

 

This handy little pricing system automatically rounds up the price of every part to end with .99. So if a part sells for $34.85, the system will round it up to $34.99. If a part sells for $295.10, the system will round it up to $295.99. It doesn’t have to be 99 cents. The price can be rounded up to end in .29 or .95 or whatever number you choose.

 

All that’s required to implement the 99 Cent Round Up feature is to change a setting in your DMS’s “Calc Code.” Not every DMS has this feature available so check with your provider to see if it does, or if there is a way to implement it. This pricing model can be used for customer pay parts, but should never be used for wholesale customers.

 

Again, this is a quiet and gradual way of growing profits over time. Over the course of a year this method alone could result in profit gains up to 25 percent.

 

Margin Pricing

 

Margin pricing is a system designed to protect dealers from losing money on parts sales to wholesale customers. Certain parts from certain manufacturers just don’t have a high margin of profit priced in to begin with. When you sell those parts to a local repair shop and give them a 20 or 30 percent discount, it’s quite possible–and this happens more than you think–that you’ve just sold the part for less than what you paid for it.

 

For example, let’s say you pay $4,000 for a transmission. Your manufacturer’s MSRP may be as low as $4,250 for a total markup of $250. If you then turn around and sell that transmission to a local repair shop for a 20 percent discount, you’ve just sold the transmission for $3,400 and a loss of $600!

 

Margin pricing automatically calculates what the margin of profit is on every part, then adjusts the discount accordingly so the dealer always maintains a profit. This feature applies to wholesale customers the most but it could apply to over-the-counter sales if the customers are asking for a discount. Your customers should understand that your dealership can’t sell a part for less than cost.

 

The margin pricing feature also resides within your DMS’s “Calc Code” so again, ask your DMS provider for help with implementing and/or setting it up.

 

Summary

 

Service is a tough business. It seems like the mindset in many dealerships is that it’s necessary to sell everything at a discount in order to get business. That’s simply not true. If a customer really wants their car repaired by a certified, qualified technician they usually understand there is a higher cost associated with that.

 

In the parts department, there are times when parts managers have no choice but to discount or sell parts at cost. But your dealership should never lose money on parts sales! Even a small profit is better than nothing at all. The best part about these pricing strategies is that they don’t negatively impact the customer’s wallet because the amounts are small and bundled into ROs.

 

I’ve worked with many of our customers to implement these parts pricing strategies. In some cases parts departments that were deep in the red have turned around and become profitable in less than a year. These strategies can work for your dealership too, with just a few simple settings changes in your DMS.