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Are Part Margins getting too hard to achieve?


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Currently customers gauge the cost of one shop vs. another entirely on labor rates.  I wouldn't mark up any parts if I could charge the labor rate required to accomplish that. In Minnesota only the parts are taxable. The labor is exempt as long as it's repair work. The customer would pay less sales tax if I charged cost on my parts, but I'd have to just about double my shop labor rate.  The total cost to the customer would be close to the same either way, but I'd have to have customers that had as much schooling on economics as they did algebra in order to get them to understand.  The other benefit would be that I just wouldn't care if the customer supplied their own parts anymore.  Wouldn't affect me or my bottom line.

 

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On 12/4/2018 at 9:18 AM, CAR_AutoReports said:

I can't speak for everyone, but I can tell you I am not ashamed to make a profit.  This is business and the way to survive is to adapt.  If you can name one industry that has not adapted to consumer behavior and survived, I would be very happy to hear about it.  Consumers have long treated this industry as if we are all thieves.  Before the internet, they had no recourse.  With the internet, they can put you out of business in 30 days time, if not sooner.

 

The medium here for discussion is how we all thrive in an environment that is turning every industry upside down, not just this one.  Part of that comes with providing a streamline experience where people pay for your experience and not your parts.  If we, as a group, adapted the mentality of my labor is where I make money, and not my parts... there would be less ability for the consumer to create havoc in our environment.  As long as we sell parts for multiples of what we are paying for them, while our consumers can research prices on their own... is as long as we'll have the mentality that's made this industry the last one to transform and shake the horrid reputation we have with the general public.

 

If you buy anything at a national chain, from the groceries in your house, to the device you are likely typing this on... you are a consumer.  Put yourself in their shoes and realize we provide the worst experience known to man.  There are no trades left where parts have such an influence on business, like this trade.  If you work on fleets, ask their owners how their business is going and what challenges they are facing.  Most of the fleets we service, make less than 20% on parts and all of their meaningful revenue is generated by labor.  Why?  Because the consumer can go to Home Depot and buy everything for the same price they can.  The consumer just can't install it, they realized that... adapted to it and are now seeing the benefit of not worrying about how much money to make on parts and focus on labor costs and managing them.

 

 

The ability to profit on parts started to erode in 2008, by 2015 we basically gave up on it, in 2018 in we streamlined our parts matrix to reflect higher labor vs higher part margins... 2019 was our busiest year yet.

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When I mentioned this exact thing on a Facebook auto shop owners group, I was basically ganged  up on by an angry mob fueled by one idiot shop owner who said I was a you tube mechanic newbie idiot. His words, not mine. Actually I’ve had a successful shop for over twenty years, but have always been forward thinking. As long as dinosaurs such as that shop owner exist in this industry we’ll never move forward. Face it, parts margins are shrinking and it’s time to adapt. I’ve been looking at ways now to get more labor out of the job and not worry so much about the parts. Any ideas would be welcome as I’m just starting to experiment with this. 

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This is an old discussion around our shop.  Our best answer is: wholesale on parts & whatever labor rate it takes to reach your gross profit goal is what is charged to customer.The challenge is we are too fearful to think about stating that actual dollar amount per hour for mechanical labor & diagnostic labor that it would take to take to a customer. Mostly due to the perception (or fact) that consumers really don't care about why; they just want to compare a number.  Many assume a good warranty, customer service, and value is standard.  We may age out before we can ever get on the same page together on this as an industry.

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That’s the exact formula I’m looking at, but worry about the high labor dollars too. I like to be a disrupter, but I don’t want to disrupt myself out of business. Do we charge $29 for brake pads and $250 to install them? Does the consumer adapt to that and say they have great parts prices but their labor is ridiculous? Has anyone tried this approach?

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Yesterday I had a conversation with an investigator for the sales tax division in my state. I ask her the following questions:

If I stop charging a mark up on parts and roll all the charges into my labor rate, would I be flagged for an audit by the sale tax division, because my overall sales would remain the same but the sales tax that I report would be cut in half. She did not think so and she had been asked the question before by other owners. Labor is not taxable in Michigan.

I then asked her "what if" I stopped charging markup on parts and started charging a "shop rate" (in lieu of a markup on parts), and that "shop rate" was a variable of (and based on) the cost of the parts used on the invoice.  She wasn't so sure how that would be received by sales tax division, by she would ask a compliance officer and report back to me. 

Personally, I would rather just have a shop rate that covers all controllable costs to the customer. Unfortunately in Michigan we are mandated to have parts & labor charges, plus billed hours, clearly called out on our estimates. It is unlikely, in my opinion, that the BAR would allow a "shop rate" other than as an additional charge on top of parts and labor, which is no less confusing to the consumer than our current scenario of marking up parts. I am currently in the middle of a friendly audit by the BAR and I will ask the compliance officer his thoughts on this. 

Maybe the first thing we need to agree on is that our true charge to any and every customer(consumer), by every and any automotive service facility, is typically:

"Our normal charge for the job minus our cost on the parts "   We control all other charges on the job, except parts cost. Regardless of what quality of part we use, there will be a parts charge and we did not set that cost.

This whole mess became much clearer to me, when I figured out that the price we charge a customer that wants to supply their own parts, is as follows:

Our charge when a customer wants to supply their own parts is whatever our normal everyday charge for the job is, less our cost on the parts required.

Once we agree that is exactly what we charge our very best customers, in every shop model, we will be one step closer to a solution, Imo. 

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2 hours ago, rpllib said:

Yesterday I had a conversation with an investigator for the sales tax division in my state. I ask her the following questions:

If I stop charging a mark up on parts and roll all the charges into my labor rate, would I be flagged for an audit by the sale tax division, because my overall sales would remain the same but the sales tax that I report would be cut in half. She did not think so and she had been asked the question before by other owners. Labor is not taxable in Michigan.

I then asked her "what if" I stopped charging markup on parts and started charging a "shop rate" (in lieu of a markup on parts), and that "shop rate" was a variable of (and based on) the cost of the parts used on the invoice.  She wasn't so sure how that would be received by sales tax division, by she would ask a compliance officer and report back to me. 

Personally, I would rather just have a shop rate that covers all controllable costs to the customer. Unfortunately in Michigan we are mandated to have parts & labor charges, plus billed hours, clearly called out on our estimates. It is unlikely, in my opinion, that the BAR would allow a "shop rate" other than as an additional charge on top of parts and labor, which is no less confusing to the consumer than our current scenario of marking up parts. I am currently in the middle of a friendly audit by the BAR and I will ask the compliance officer his thoughts on this. 

Maybe the first thing we need to agree on is that our true charge to any and every customer(consumer), by every and any automotive service facility, is typically:

"Our normal charge for the job minus our cost on the parts "   We control all other charges on the job, except parts cost. Regardless of what quality of part we use, there will be a parts charge and we did not set that cost.

This whole mess became much clearer to me, when I figured out that the price we charge a customer that wants to supply their own parts, is as follows:

Our charge when a customer wants to supply their own parts is whatever our normal everyday charge for the job is, less our cost on the parts required.

Once we agree that is exactly what we charge our very best customers, in every shop model, we will be one step closer to a solution, Imo. 

I personally think you made a few mistakes here.

a) You're trying to substitute parts for another line item, and that just looks shady when it comes to taxes.

b) You're now trying to lump your parts margin into a new category and have that on the invoice

c) Under no circumstances is a customer who provides a part to get a better deal than a customer where you are the one supplying the part.

 

What we did here:

a) Raised our labor rate to reflect the quality of service provided

b) Maintain accurate records on the amount of time actually spent on vehicles. Many jobs go over at least an hour because of rust/corrosion and the after service check list.  Like going over the service, cleaning up the mess made from the service, test driving the vehicle.  From these accurate counts, we bill with a 90%+ accuracy now.

c) Lowered prices on parts to a justifiable degree.  Most of our real margin is on items $100 or less.  Most stuff over $100 still has a margin, just nothing like you'd expect in most circumstances.

 

Also, customers who buy their own parts aren't generally welcome here.  Liability has become so large, that the instances where customer acquired parts are used, have been greatly reduced.   We will figure it out and you can bring it somewhere that allows you to use your own parts or you can keep going around town till you find the guy willing to help you save money over his own needs to survive.

 

We also didn't make our change overnight.  So what I might suggest:

Lower your parts margin and raise your labor rate.  Like a $10 raise in rate coupled with an equal decline parts margin based on the hours you bill a month.

Try that for 6-12 months and see where you land.

Then readjust till you can reduce your margin.

 

Our goal:

To get all parts to a less than 50% margin. We're still a little bit away, but we are close enough to where online retailers don't make us look like we are just fleecing people.  Consumables like brakes, air filters and oil/oil filters are the hardest to get down to reasonable levels.

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  • 4 weeks later...

We charge by the job but we do breakdown parts and labor on the ro. Once in a while someone will question the markup I reply "the Amazon price is if you do it yourself" end of story we don't put in your parts I need to buy groceries like everyone else. Some people complain about the 8.5% sales tax i tell them to call Albany it's not up for discussion. 

I suppose we could just raise the labor rate to compensate but I'm afraid its going to be a race to the bottom once everyone starts wholesaling parts 

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  • Have you checked out Joe's Latest Blog?

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      It always amazes me when I hear about a technician who quits one repair shop to go work at another shop for less money. I know you have heard of this too, and you’ve probably asked yourself, “Can this be true? And Why?” The answer rests within the culture of the company. More specifically, the boss, manager, or a toxic work environment literally pushed the technician out the door.
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