Labor margin vs parts margin

[bstewart]

This has been brought up a couple times on this forum, and it is something I'd like to discuss. (As with my other thread, the numbers are chosen to simplify things and might not apply to all places)

 

As we all know (or should know), the "gold standard" for a profitable shop is 70% labour margin and 50% parts margin and a 0.8:1 parts:labour ratio.

With your techs making $30/hr, this equals a labour rate of $100/hr.

With your 0.8:1 parts:labour ratio, this equals $80/hr worth of parts, costing you $40.

Thus, each bay should be making $180/hr with base input costs of $70/hr for a gross profit of $110/hr (don't worry about fixed costs in my example)

 

Now imagine the same shop as above, but instead have a 75% margin on labour and 33.3% margin on parts.

Same input costs: tech making $30/hr, and parts costing $40/hr.

Your labour rate would be $120/hr, and your parts sales would be $60/hr. You still get the same $180/hr for each bay and $110/hr gross profit.

Nothing has changed when looking at the financial aspect of your business.

If you are selling work by the job and not by the hour (as you should be), most of your customers probably wouldn't even notice the difference, since the price/hr is the same as before.

 

But in this situation, your customers will now know that they can't get the part cheaper at the parts store down the street. Or if they can, the difference is rather negligible.

As a matter of fact, you could boast this to your customers. Make it a big selling point for your business.

On the plus side, it practically eliminates the fight with people who want to bring their own parts.

You could also market that you provide "premium service" to your customers, in the form of better inspections, callbacks, texts emails and mailers, front counter service, diagnostics, road tests, etc etc.

 

Would some customers balk at a higher labour rate? Probably, but it's not necessarily a bad thing. If 5-10% of your "good" customers aren't complaining about your prices, they probably aren't high enough anyways.

But is this pricing more realistic to what your customers are actually paying for when they come to your business? I believe so.

Is it more fair to your customers? I believe it is, since they know what they can get the part for, but they don't know your wages, your fixed costs, etc.

As we all know, perception is everything to the customer, and if they perceive that you are ripping them off on parts, it will leave a bad taste in their mouth. Even if you properly explain that you add value through inspection and warranty of their parts.

 

I know there is at least one member on here who has adopted this pricing structure, I'd like to know if there's any others, and what have been your impressions from customers about this.

Edited April 1, 2014 by bstewart

[Joe Marconi]

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[bstewart]

I agree 100%, Joe. Every shop needs to know their breakeven point, and have a pricing structure in place to make a reasonable net profit at the end of the day/week/month/year.

Like you said, it's a well known fact (or should be well known) that your labour margin is far more important then your parts margin.

Labour margins will become even more important compared to parts margins in the future as vehicles are made better and require fewer parts to fix and maintain, but more labour through preventative maintenance, diagnostic, reflashes, etc.

20 years ago, a healthy parts to labour mix was 1 to 1, now it is 0.8 to 1. What will it look like 20 years from now? 0.75 to 1? 0.7 to 1? Even lower?

Labour margins will make or break a shop in the future, even more then they do now.

 

On to your second point, I honestly don't believe we put too much emphasis on parts pricing. We are reacting to a consumer and industry trend that threatens profit margins.

Consumers have been given an option to find a multitude of information via the internet, and they use it to compare pricing on parts because it's one thing that they can have a little bit of control over when having their vehicle repaired.

I know this because I'm exactly the same way, I do a lot of price checking online to find the best pricing on my parts for my own vehicles.

So, looking through the customers perspective, they know that labour is expensive, no matter where they go. But if they can save $10-20 on the same part, they feel that it's their right, and I have to agree with the consumer.

 

The problem is when they are comparing a lower quality part online to a higher quality part in a shop.

This is a problem that each shop's marketing has to solve, by showing your customers the difference between the quality part and the cheaper part.

Perhaps shops need to start offering a "low tier" option to the extreme-budget-minded customer?

Explain to them that no warranty (or very little, maybe 1-3 month) will be offered, so the 20-30% that they are saving on the part could (and most likely will) cost them more in the long run.

 

I believe that this is what customers truly desire. Not cheaper parts per se, but the option of cheaper parts. Or rather, options on their parts (some customers might want top-of-the-line OEM parts only, and not be given an option for that either)

Customers don't like being told that they have to buy one product, they want to choose the best one that suits them, and I feel inclined that we as an industry should be giving them the choice.

 

I've been thinking about how I'm going to sell parts when I get my own shop.

When quoting parts to the customer, I think I'm going to quote 3 options (using the good, better, best system):

1. A value part (not the cheapest that you can buy, mind you) for the budget minded customer, with little to no warranty.

2. A premium quality aftermarket part that would come with the shops full warranty (hopefully 1-2 years)

3. A OEM dealer part, that would obviously come with the highest price, and could be offered with the best warranty (either the same as premium aftermarket, or slightly better)

This way, the customer chooses the right part for him, rather then just being told that "we only sell premium aftermarket parts" when maybe that isn't what they are looking for.

 

Sorry for being long winded in all my posts, I've just got a lot of ideas rolling around in my noggin'.

[Jeff]

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[phynny]

Here are the standards I and most large chain shops shoot for

25% parts

27% labor

>25% overhead

The rest would obviously be profit.

 

After your facility is paid off you can see how your profit will skyrocket.

[bstewart]

I think this is an excellent post that we could dissect in probably another entire thread, but just a quick question for now,

Here are the standards I and most large chain shops shoot for

25% parts

27% labor

>25% overhead

The rest would obviously be profit.

 

After your facility is paid off you can see how your profit will skyrocket.

This is an excellent post, that we could dissect in another thread by itself, but just a quick question:

Does the 27% labour include your (owner's) salary? Or do you account for it some other way like from the profits? (I hope not)

Edited April 13, 2014 by bstewart

[mmotley]

Here are the standards I and most large chain shops shoot for

25% parts

27% labor

>25% overhead

The rest would obviously be profit.

 

After your facility is paid off you can see how your profit will skyrocket.

Curious where you got these numbers from?

[GeeZ]

What does >25% overhead mean? You want your overhead to be greater than 25%? You mean less than 25%.

[bstewart]

What does >25% overhead mean? You want your overhead to be greater than 25%? You mean less than 25%.

He's saying that your overhead will be greater than 25%.

25+27+25 = 77%

Profit would be (theoretical maximum) 23%, but every 1% of overhead is 1% less profit that you see.

[phynny]

Overhead should be less than 25%. Typo :/

[bstewart]

Well then disregard my last post on the issue haha.

 

Are those numbers possible/viable in a real world shop?

I've never heard of a shop making 23% or more in profit. 15-20% seems to be the maximum that most books and forum posters claim you can achieve.

 

Obviously it would be shop specific, but which of the 3 factors you listed go up the fastest if your profit drops below 20%? Or do they all go up by the same amount?

[phynny]

Parts markup will never change and my payroll for lube techs stays the same and my A and B techs are flat rate so the numbers stay dead even. This is most definitely real world numbers

[mikesauto2427]

This maybe the wrong place to post this. But my problem is my parts store is charging customers 5 dollars over my cost. So when I give a customer list price on a part they come and tell me it's bull. Customers are getting the same price I am.

[mmotley]

This maybe the wrong place to post this. But my problem is my parts store is charging customers 5 dollars over my cost. So when I give a customer list price on a part they come and tell me it's bull. Customers are getting the same price I am.

Why are you charging list prices? Raise your labor rate to account for this and charge regular prices on parts.

[ncautoshop]

This maybe the wrong place to post this. But my problem is my parts store is charging customers 5 dollars over my cost. So when I give a customer list price on a part they come and tell me it's bull. Customers are getting the same price I am.

Sell the value of your service, warranty and customer service and forget the price. Well don't forget it but don't focus on it. If their complaining, your not charging enough. Of course let your parts store know about the problem. If you don't mind me asking who are you buying from?

 

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[mikesauto2427]

Bumper to bumper.mainly Midwest market

[ncautoshop]

Bumper to bumper.mainly Midwest market

We had a locally owned one that went out of business for that exact reason. If you've got a private store, that's just another benefit of your product.

Supplied by locally owned businesses.

Have you researched other vendors in your area, for instance worldpac?

 

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[mikesauto2427]

The only stores I have are advanced auto and Napa. Is world pac strictly online?

[ncautoshop]

The only stores I have are advanced auto and Napa. Is world pac strictly online?

Worldpac Is strictly wholesale, and doesn't retail parts to consumers. One upside being they sell primarily products manufactured by the OE supplier, downside if they don't have a facility near you shipping cab be higher.

Have you checked with advance auto? They've always taken very good care of us.

 

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[mikesauto2427]

I want to let you guys know. I am giving my parts guys hell. Thanks for the advice.

[xrac]

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[mikesauto2427]

Currently my bumper dealer and advanced auto are running deals for walk in customers. Every strut is only 15 dollars over my cost. It goes all summer. Wow. I pay extra for being a certified center.

[mikesauto2427]

My local parts store's are now selling struts 15 dollars over my cost. They flat out told me it's all about retail.

[ncautoshop]

Currently my bumper dealer and advanced auto are running deals for walk in customers. Every strut is only 15 dollars over my cost. It goes all summer. Wow. I pay extra for being a certified center.

I think I'd speak with your commercial accounts manager at advance, not a in store rep. I know they are running specials but the specials I've seen are rebates not in store deals. Lastly like I said, you don't want to match or beat their price. There is an advantage to not being the cheapest in town! If I ever find out I'm the cheapest in town I'll be going up on my prices lol

 

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[mmotley]

Why is it so hard to justify raising your shop rate? It seems like a lot of people think they should be able to mark up their parts 50%, but hell will freeze over if they raise their labor rate?

[ncautoshop]

Why is it so hard to justify raising your shop rate? It seems like a lot of people think they should be able to mark up their parts 50%, but hell will freeze over if they raise their labor rate?

I'm working on raising my rate after seeing some of your post. I'm definitely doing it, slowly working my way to $80.00

 

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[xrac]

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[MiataItsTheBest]

$80 and $87? We're at $98 in FL and thinking of reducing margins on parts and increasing that. Although we do have a high german/swedish car count as we openly promote that we work on them, but still get American and Japanese car customers that pay the same rate. Don't be afraid to take pride in your labor and command your pay. Just make sure to walk the walk as well.

[Elon Block]

bstewart directed me to this post because the subject matter is related to a pricing
conversation going on here:
http://www.autoshopowner.com/topic/9788-do-you-guys-perform-fleet-work-do-you-work-on-sprinters-how-profitable/

As I indicated in the other thread, pricing of parts and labor is a big subject and there

is no one-size-fits-all answer. There are a number of things to consider when we're
talking about pricing.

For example, how does your pricing strategy impact what happens at the counter?

Because everything that happens at the counter affects your entire business.

So with that in mind, we need to look at it from the customer's standpoint. And we

need to look at it from the shop's standpoint.

Let's start with the customer's standpoint.

The Good, Better, Best method is a great way of selling tires.

Because when you sell tires, your Good, Better, Best options for your customer

allows them to choose a tire based on a number of variables, primarily mileage.

For example, the customer gets to choose from a 50,000 mile, a 65,000 mile

and an 80,000 mile tire based on how much they drive the car and how long

they plan to keep it.

This is very easy for the customer to wrap their mind around and understand.

In other words...
If the customer chooses the 50,000 mile tire, it's easy for them to understand

that if they drive (the national average of) 12-15,000 miles per year, they'll

get at least 2-3 years out of their investment.

If they choose the 65,000 mile tire, they'll get even more years out of their

investment. And so on, with the 80,000 mile tire.

That's a decision that's very easy for the customer to comprehend and

make an educated decision.

If your service advisor was to offer a Good, Better, Best when they're

talking about a repair to a vehicle - meaning they're going to

ask your customer to choose a part with: no warranty, or a 6 month warranty
or a 2 year warranty (for example).

It's impossible for the customer to make an educated decision about what's
best in the situation. They have no idea what the normal life of a part might be.

They don't know anything about cars - like you do.

But let's say, in their confusion, they choose the least expensive part...

Let's look at how this will play out later - at the counter....

If the part fails, your service advisor now finds themselves in a defensive position
which means he/she is now having to spend time reminding the customer,

"Well, Mr. Jones, this is the option you chose and this is the end result of you making that decision."

Any way you look at it, this becomes a losing battle for both the shop and the customer.
So, why even go there?

Most people do not want a ton of options. They just want you to explain to them in
a SIMPLE, straightforward manner about what they should do.

(In other words, coming from a place of: What would YOU do if this were YOUR car?)

So, here are some key factors to consider:

What do you want to be known for? Do you want to be known as the cheapest in town?
Or do you want to offer quality service, and quality parts - all at a fair price? Or somewhere
in between? And then, based on that....

Make it simple for everybody. In other words...what is the warranty you want to provide
to your customers on ALL of your work?

6 Months? 1 Year? 2 Years? 3 Years? Lifetime?

Any one of those options is fine. Pick one and stick with it and then, be confident in
what you're selling. Because you're the expert.

One more point on pricing...

The price is only one factor a customer is considering.

These are 6 other factors/concerns your customers have BEFORE they even
walk up to your counter or pick up the phone to call you. Even if that person is a
LONG-TIME customer, they have CONCERNS they are weighing every time
they have to make a decision, regarding the maintenance of their vehicle.

Here's a video that covers the "7 Critical Concerns":
http://youtu.be/6wZKsQwbhMU

Understanding the customer's mindset will help you sell more service - without
discounting your prices.

[bstewart]

Great post, Elon, but I'm going to have to disagree with you on a couple points.

 

1. Even if you don't like giving people too many options, I feel that you should at least offer them a Good/Better option being aftermarket (preferably high quality) vs dealer parts.

There is a segment of customers who only puts OEM parts on their vehicle (nothing but the best for my baby), because of the peace of mind it offers.

The video that you posted even mentions giving customers options tailored to their current situation to make them feel like you are trying to suit their needs.

 

2. A flat warranty on all your repairs sounds great, but I feel tiered warranty is a perfect way for your customers to find their own perception of value in your services.

Ever been to an electronics store and been offered an extended warranty? Half the people decline it thinking it's a ripoff, the other half buy it every time because it gives them peace of mind for years!

A customer might be selling the car soon and wants it fixed low cost, does this make them a bad customer? No! Their value comes from low pricing, not a warranty that will outlast them owning the vehicle.

 

The point I'm making is that not every customer is the same, so you can't offer them all the same thing and expect them all to be happy with it. You said it yourself, there is no one size fits all solution.

Great post otherwise! The video was great too.

Edited December 18, 2014 by bstewart

[alfredauto]

In my area the competition plays the labor game of $30/hr and then they charge 3x book time for every job. We have a realistic labor rate and quote by the labor guide. Same result different approach. By having a much higher labor rate I don't have to explain why I billed 3 hours for a 1 hour job because it never happens. Plus it weeds out the bottom feeders. Overall 99% of my customers don't ask to break down the price, "hi mrs smith you need a new gazinta plus we recommend the kanuter valve too while we're in there it's $1234.56 parts labor and tax" "OK call me when it's done" end of story. Now if I quote the gazinta based on $100 at napa and az or cq has the same quality part for $60 I keep the extra $40 as a smart shopper reward. It sucks price shopping every job on my end but it's become a necessity. There's sometimes 75% variance between the 5 parts stores that deliver for the exact same part. The colors on the box are different the parts on the inside are identical in every way right down to the manufacturer and part #.

 

As far as good better best goes it makes it harder for a customer to decide when there's too many choices. Even with tires we stock what I would put on my car in the sizes we carry. It makes it easy "we can order anything you would like but I keep xxxx in stock because I feel it's the best choice for a number of reasons in this particular size." Example 185/70r14 we carry the cheap tire because it fits old Junkers, 245/40r18 we carry a brand name because it fits more expensive cars. The mileage warranties are bullshit marketing strategies anyway but that's a different topic.

Our parts/ labor warranty is the same 12/12000 for everything so it's best for us if we decide what we feel will last them at least a year.

So to conclude my novel I recommend what I feel is best which makes decision making easier for the them. Too many choices and they can't decide and hold off. They present the problem, we suggest the solution. KISS. After-all isn't that why they went to the professional in the first place?

Edited December 21, 2014 by alfredauto

[Elon Block]

They present the problem, we suggest the solution. KISS. After-all isn't that why they went to the professional in the first place?

This sums it up nicely. We also believe in the KISS Principle. (Keep It Simple and Straightforward)

 

To piggy back on what you said....

 

If the Sales Process is not simple for the sales people to use...

 

And it's not simple for the customer to understand...

 

The shop will have empty bays, techs standing around doing nothing, and will struggle to make a profit.

[KMS]

Knowing your cost is key, I try for 60% Gross Profit. It doesn't matter where is comes from. I have taken many classes on this subject. The most important thing I learned was "Charge your customer's to profit!" Never be afraid to be the same price as the dealer or even more. Do you charge EPA or Shop Charges? Don't charge parts and labor to your customers. Charge per Service (Parts and Labor together). Never seperate unless asked to. Remember, you are a Service Shop, not and Parts and Labor Shop.

[mspecperformance]

Great post Koala, btw I buy your products they are great!

[KMS]

Great post Koala, btw I buy your products they are great!

You're Welcome and thank you.