Parts and labor are the two main avenues your auto repair shop has for making a profit. There’s quite a bit to consider when pricing labor (check out our guide, Labor Times for Auto Repair Shops, to see how Tekmetric makes that process simple). When we look at how shops make a profit on parts, the good news is that landing on the right pricing is less complicated.
Currently, you might be leaving parts markups up to individual service advisors. Each time they come across a part on an invoice, they think, “what’s a fair mark up?” Or, perhaps you’ve hacked together a process for parts markups so that service advisors can go off of a guide.
But even with a guide, you might feel like your shop’s not making as much on parts as it could. Or, you might feel like there’s inconsistency in terms of what gets marked up and by how much, leaving customers with questions. By using an auto parts markup matrix, you can take the next step up and create the ultimate streamlined process for marking up parts.
With an auto parts repair markup matrix, also called a parts matrix, there’s no more second-guessing. Instead of spending precious time figuring out the right markups, you can keep your team prosperous and happy by hitting your shop’s gross profit goals. As an added bonus, a parts matrix also enables your shop to quickly pass along good deals from your parts vendors to your customers. Win-win!
Let’s take a quick step back. Before you decide how much to mark up a part, you obviously have to buy that part (or find it in the inventory). When shopping for parts, getting good deals is important, but so is having an efficient process for finding those deals. Efficient shops find a balance between quickly finding parts and snagging good deals.
There are various ways to quickly shop around and find the best deal on parts. Some shops still send their parts to the local auto parts shop or junkyard to find those hard-to-find parts. While these methods may take some extra time, they are valid to find good deals.
These days, many auto repair shops save themselves a lot of hassle by turning to shop management systems that enable them to swiftly compare prices from multiple vendors at once. With online parts houses, repair shops can earn back the time they would have spent sending someone to hunt down these parts and making these comparisons in person.
After comparing prices and deciding which part(s) to buy, it’s time to find the markup “sweet spot,” where it’s a good deal for your customers and your business.
As a general rule of thumb, the more expensive a part is, the less you can mark it up.
Consider this: fast food companies make some of their highest profit margins off of their least expensive menu item—soda. If a cup of soda costs the fast-food company $0.25, charging a dollar for it gives them a 75% profit margin. But a 75% profit margin on a hamburger that costs the fast-food company $7 to make would hike up the price to $12.25. Can you imagine spending $12.25 on a fast-food burger?
Now, let’s bring it back to the shop. If you double the price of a $10 wiper blade, the customer won’t bat an eye. But if you try to mark up the price of a $400 alternator by 50%, it’s a different story! The customer will balk at the $800 price tag and probably go ask another shop for a second opinion.
With a parts matrix, you can strike just the right prices for parts in accordance with your shop’s gross profit goals. After all, gross profit is king!
For example, let’s say you buy a part for $5 and want to make a 50% profit off of it. With a parts matrix, you can stipulate that any part between $0.01 and $5 gets you a profit of 50%. A shop management system like Tekmetric can automatically calculate what the markup should be once you enter your desired gross profit percentage. But more on that later.
We just covered a simple calculation—marking up parts in a certain price range by a specific amount.
There’s another way to approach parts markups, and that’s via a compound calculation. With a compound calculation, parts are marked up by different percentages within specific cost ranges. For example, if you sell a job for $20, you could mark up the first $10 by 10%, and the last half by 20%.
Compound calculations are more complicated, and some shop owners avoid them due to feeling like they eliminate transparency with the customer. However, using a compound calculation for your markup matrix can give you an edge when it comes to increasing your gross profit margins. Some shop owners that use complex calculations in their parts markups have been able to increase their profit margin by about 8% to 10% when compared to using a simple calculation.
Ultimately, each shop has unique needs and preferences, and it’s up to you and your team to determine which type of calculation to use when building your parts matrix.
Tekmetric makes it a breeze to build parts matrices! You read that correctly—parts matrices. You can build more than one parts markup matrix with Tekmetric.
Here’s how to start building parts matrix #1 in Tekmetric:
Step 1: Go to “Shop Settings”
Step 2: Navigate to the “Markups” tab
Step 3: Select “New Parts Matrix” at the top of the screen.
Step 4: Choose whether you’d like to use a “Simple” or “Compound” calculation from the drop-down menu on the bottom left.
Step 5: Begin configuring your parts matrix by inputting start and end costs. Add additional ranges as needed.
Step 6: Set a gross profit goal for each range by selecting “Gross Profit” and entering your desired percentage. You can also select “Multiplier” or “Markup” if you wish (a markup shows the markup value as a percentage and a multiplier shows the markup value as a decimal).
Step 7: Name your parts matrix—then hit “Save Matrix”!
From there, you can continuously tweak your parts matrix as needed.
In Tekmetric, there are two ways you can apply a parts matrix to an RO—by auto applying it across the board or by manually applying it within individual ROs.
You can auto-apply your parts matrix across the board in seconds. After you hit “Save Matrix,” (refer to Step 7 in the section above) simply click the star by “Make Default” and then select the box by “Auto-Apply.”
Especially if you have more than one parts matrix, service advisors may want to pick and choose when they apply it.
Here are the steps to apply a parts matrix to individual ROs:
Step 1: Open a repair order and navigate to the “Estimate” tab
Step 2: Scroll down to where you see the listed “Jobs.”
Step 3: Add a new job.
Step 4: Click “Add Part” and then select the appropriate option from the drop-down menu (between “Add part manually,” or “Add part from Inventory.” You can also add a part from your vendor of choice).
Step 5: Start entering the part details, then select the calculator icon under the “Retail” heading.
Step 6: Select “Apply parts matrix” from the drop-down menu and pick the parts matrix you’d like to apply from the pop-up.