Editor’s note: This is the second installment of a multi-part series, “Workflow to Cashflow,” by Dave Schedin, of CompuTrek Automotive Coaching & Training, who has more than 40 years in the automotive field and has coached shops to higher profitability since 2006.
In Part One, we looked at mindsets around labor rates to create profitable labor. Next, let’s dive into parts pricing, what may be driving your profits down, and clarify a few pricing considerations that can elevate your profits.
First, the elephant in the room: “Is it ethical to be profitable?” So where is the line you’ve drawn where you believe “ethical profitability” should be? Some draw the line at manufacturer or parts jobber suggested list price — but hang onto your seat … the mathematical reasoning behind most “suggested” parts list pricing is: THEY MADE IT UP!
We all know that manufacturers have a profit they will not budge from, so they sell to the jobber, or middleman, at a price they know will profit them. Then they “suggest” a price for the jobber to sell to you of what they feel the jobber should make based on a made-up percentage number. Then, they set a consumer list price guessing what we, as shop owners, need to be profitable also based on a guessed percentage.
The problem is, manufacturers do not know our business model in our real-world environment, setting retail pricing so their parts to the consumer won’t look expensive. They are not on the front lines having to state the value of their parts, so they use pricing as a way to show value.
A profitable shop means happy customers
The most ethical thing you can do for your customers is to be profitable so you can afford to give them industry-leading warrantees, hire the best of the best and still be here amidst any economic crises, not unlike what we are facing now with the coronavirus fear. If you make enough to simply survive, or worse, go broke, how is that servicing your customers?
It’s easier to understand this when we talk about technician labor. When it comes to a service advisor, manager, support staff or owner’s worth, it moves from a realm of subjective and tangible, to objective and intangible, guessing on the value that you’re placing on those positions.
We see the techs working hard labor and feel they are worth it as we see blood, sweat and tears in their efforts. They have invested in tools, and even equipment at times, to do their job. Their work is mostly left-brain based, facts, data and very tangible steps in producing their work. It’s also based on time elements of sold hours versus actual hours versus available hours. It’s easy to put a value of a wage based on skill sets and production throughout. It’s all about the DOINGNESS!
Apply that thinking to service advisors, managers, and owners (front staff) and it will create confusion and tend to undervalue what the front staff actually does using mostly intangible skill sets they use to produce the sold hours for the techs to go DO.
The front staff’s number one skill set is “emotional intelligence,” which is on the right-brain emotional relationships side. Managers manage systems (tangible) and they lead people (intangible). In order for advisors to create a repair order (RO) that a vehicle actually needs, they must use their skill of creating value (intangible skill). In other words, tangible action steps comes from front staff’s intangible emotional people skill sets.
It’s easy to teach how to create a RO based on only what the customer gives you. Not so easy to get beyond order taking (1.0-1.5 hours per RO average) and express higher value of the vehicle’s true needs (3.5-4.0 hours per RO), based on the personality type and character traits of the customer standing in front of them in this moment. Then 5 minutes later, they have a completely different type of customer they need to emotionally shift value expression to meet their needs to get the job sold.
Some of the sold labor profits goes toward the front staff, but it can’t afford all of the front staffing costs. In today’s market, it has to also come from higher parts profits. When you compromise on parts profit you are, in a sense, devaluing the front staff. The ironic thing is, it’s the front staff that devalues themselves as they are the ones setting the pricing to the customer.
Setting parts pricing works best with a deep, clear forecasting of looking at where you are now at point “A” in parts profitability and then, where you need to be, point “B” for creating a great livelihood for ALL the staff. Partner deep forecasting with an elevated advisor incentive plan and you create a win-win.
Parts matrixes are used to let your point-of-sale system make it automatic when a part is put on a RO. Some systems only allow for one parts matrix while others allow for multiple matrixes based on costs, such as from different type vendors sourcing and even vehicles systems (i.e. brakes, engine mechanical, driveability, etc.) can all have their own matrixes.
The three most common parts matrixes are based on vendor sourcing:
- Local parts stores: Jobber
- Warehouse distributors (WD)
The industry benchmark for years for parts was 50 percent parts gross profit (GP). However, this benchmark is outdated as it didn’t account for today’s marketplace demands on repair centers from federal and local taxes, regulations, employee benefit mandates, need to attract a higher level of entry-level workers based on incentive plans, longer parts and labor warranties expected by consumers — the list goes on. For shops to earn the profits needed, the new mark is between 55-60 percent as an average at the end of each month. Automated matrixes help do that for you without having to always remember how to price out your parts.
Applying the most common universal matrix, jobber, to all three can underprice it or overprice it for the marketplace. CompuTrek has three core matrixes** based on these three vendors sources. They are set to drive 55-60 percent parts GP. And there is even a finer refinement when you start applying the matrixes to vehicle systems noted above.
The number one element that keeps your parts profit low is fear and low-lying emotional intelligence. I coach shops whose “fear level” got to 62 percent with a high level of customer satisfaction and I also see shops who have a hard time pricing higher than “suggested” retail pricing, typically only a 35-40 percent GP, and many of those have a lower customer-satisfaction level.
It’s not about the price. It’s about the value expression of ALL that you do. Step one of better parts pricing is to value the front staff and be able to pay them for what they are worth. Step two, get training on how to elevate your value expressions for what it is you do and offer to your customers.
Proper parts pricing is a win for the customer, win for the advisor and a win for the shop.
** Forward this “Aftermarket Matters Weekly” to another shop and cc Coach Dave (email below). CompuTrek will email you the Three Level Parts Matrix Excel Workbook, described above, at no charge.
Next from Coach Dave in the Workflow to Cashflow Series: Part 3 – Bundle Pricing Incentive Strategies. Dave Schedin can be reached at 800-385-0724, firstname.lastname@example.org, and www.computreksystems.com. A complimentary 30-minute discussion is available for the asking.