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bstewart

Labor margin vs parts margin

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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 by bstewart
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Edited by bstewart
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