When it comes to Part Margins, We are in the wrong business

[Joe Marconi]

My wife and I went to Mall yesterday to buy a gift for my grandson. We passed the men's belts and noticed a sales offer; 30% off all Belts. I stopped to look, and my wife said, "Don't you need a new belt?"

 

So, I picked a $40 belt that was marked down 30%, which brought the belt down to $28. My wife pulls out a $20 coupon, which brought the price down to 8 bucks!

 

What is the real price on the belt?....what is the cost price to the store on the belt?

 

Makes you think, right? I struggle with 10% discounts on AAA customers.

 

Is price all smoke and mirrors, when it comes to retail?

 

 

[bstewart]

Unfortunately, a fair price is whatever people are willing to pay for an item, regardless if the markup is 10%, 100% or 1000%.

I'm from Canada, and routinely our prices on just about everything are higher then in the US. Most of the time much higher.

For the past couple years, our dollar was at par with the US dollar, but our prices on everything were still usually 10-20+% higher.

That same belt would probably be $45-50 here, even though the retailer's cost was probably $5-10 in both countries, with something like a 500-1000% markup.

Why you ask? Because it's the prices we are willing to pay. Plain and simple. Not enough Canadians travel south on shopping sprees, or to buy new cars etc. We don't let our money do the talking.

 

Now back to an auto service point of view.

Unfortunately, our average consumer has been told countless times by discount parts stores that our prices are too high.

Therefore, through perception alone, they feel that they are getting screwed, regardless of whether they are or not.

Our industry doesn't help our cause, with lots of "rat hole" shops not marking up parts correctly.

 

I'm not really sure what can be done to break consumers of this mindset, or whether we should be taking an "if you can't beat em, join em" attitude.

I outlined my theory in the following thread: http://www.autoshopowner.com/topic/9381-labour-margin-vs-parts-margin/

Perhaps good shops should be looking at increasing their labour margins, and reducing their parts margins, to reduce our dependence on making lots of money from parts sales.

My theory will also have the added benefit in the future, as vehicles get better and require less parts to maintain, we will become more profitable because more and more jobs will be labour intensive, rather then parts intensive.

Our industry is changing from us being "parts changers" to us being "vehicle technical experts" where we diagnose and fix problems, often times with little to no additional parts sales (think reflashes, diagnostic etc).

Maybe we need to change our pricing structure to reflect this fact, and stop depending on parts margins to keep us afloat?

[Joe Marconi]

Unfortunately, a fair price is whatever people are willing to pay for an item, regardless if the markup is 10%, 100% or 1000%.

I'm from Canada, and routinely our prices on just about everything are higher then in the US. Most of the time much higher.

For the past couple years, our dollar was at par with the US dollar, but our prices on everything were still usually 10-20+% higher.

That same belt would probably be $45-50 here, even though the retailer's cost was probably $5-10 in both countries, with something like a 500-1000% markup.

Why you ask? Because it's the prices we are willing to pay. Plain and simple. Not enough Canadians travel south on shopping sprees, or to buy new cars etc. We don't let our money do the talking.

 

Now back to an auto service point of view.

Unfortunately, our average consumer has been told countless times by discount parts stores that our prices are too high.

Therefore, through perception alone, they feel that they are getting screwed, regardless of whether they are or not.

Our industry doesn't help our cause, with lots of "rat hole" shops not marking up parts correctly.

 

I'm not really sure what can be done to break consumers of this mindset, or whether we should be taking an "if you can't beat em, join em" attitude.

I outlined my theory in the following thread: http://www.autoshopowner.com/topic/9381-labour-margin-vs-parts-margin/

Perhaps good shops should be looking at increasing their labour margins, and reducing their parts margins, to reduce our dependence on making lots of money from parts sales.

My theory will also have the added benefit in the future, as vehicles get better and require less parts to maintain, we will become more profitable because more and more jobs will be labour intensive, rather then parts intensive.

Our industry is changing from us being "parts changers" to us being "vehicle technical experts" where we diagnose and fix problems, often times with little to no additional parts sales (think reflashes, diagnostic etc).

Maybe we need to change our pricing structure to reflect this fact, and stop depending on parts margins to keep us afloat?

 

You bring up some very interesting points. Question, overall, are shops in Canada finidng it hard to remain profitable? It seems that margins on labor and parts has shrunk, while expenses have increased. Your thoughts?

[ScottSpec]

This may sound a bit out there, but there are times when I have wondered how things would work if we just sold all parts at our cost. I think it would deter customers from wanting to bring their own parts or to be tempted to buy the parts elsewhere and they would save some money on sales tax. We would no longer have to worry about parts margins etc. I've even considered just paying tax on all parts purchases, passing that along to the customer as the cost, and get away from collecting and paying the tax. It might mean doubling our labor and adding service fees, to make up the difference. Again, just an idea I have played with and thought I would share.

 

Scott

[bstewart]

 

You bring up some very interesting points. Question, overall, are shops in Canada finidng it hard to remain profitable? It seems that margins on labor and parts has shrunk, while expenses have increased. Your thoughts?

From what I've read on Canadian shop surveys, the main problem with profitability is the same as in the US. Low HPRO and ARO.

Many lower quality shops have an average HPRO of 1.4 or lower, and ARO of $180 or lower.

A 2010 study of Canadian firms found that the average shop has 5 bays and 2.8 techs, but the top 25% of shops make 45% more sales in a year vs the bottom 25%.

The biggest difference between the 2 groups is service advisors. The top 25% group has 1.22 SA's, where the bottom group has 0.88 SA's, almost 40% less, for the same number of techs.

The most interesting fact in the study, daily sales per SA was almost exactly the same for ALL SHOPS, which means that each service writer has a maximum dollar capacity of about $2800/day.

Want to make more then $2800/day (700k/year)? Add another service writer, plain and simple.

It's quite an interesting (and short) study, you can read it here: http://www.aiacanada.com/uploads/2010_website/publications/2010_Automotive_Shop_Survey_en_March_16_2010_V2.pdf

I'd be willing to bet that most of the data strongly correlates with US shops as well.

As a generalization about Canada vs the US, we weren't hit as hard in the recession, so there's more jobs and discretionary spending up here. The dollars are there, ripe for the picking, it's just up to our shops to make the sales happen.

 

This may sound a bit out there, but there are times when I have wondered how things would work if we just sold all parts at our cost. I think it would deter customers from wanting to bring their own parts or to be tempted to buy the parts elsewhere and they would save some money on sales tax. We would no longer have to worry about parts margins etc. I've even considered just paying tax on all parts purchases, passing that along to the customer as the cost, and get away from collecting and paying the tax. It might mean doubling our labor and adding service fees, to make up the difference. Again, just an idea I have played with and thought I would share.

 

Scott

That's a very interesting theory, and I'd be especially interested to see you (or someone else) to put it to the test and see how it goes for a 3 or 6 month trial!

Using my formula from the other post, a hypothetical shop would have a shop rate of $140/hr on a $30/hr tech wage to maintain a $110/hr margin.

You'd have to maintain a strong marketing presence to make sure your customers know that they are getting parts at cost, in return for the increased labour charges.

Edited April 8, 2014 by bstewart

[alfredauto]

I try to re-educate the customers that price shop the parts. If I say my water pump job is $200 and they want the breakdown, the pump is $50 and the labor is $150 for example. If they respond they can get the pump for $20 I remind them they can buy an egg for .10 but the omelet still costs $10. I see your point of selling at cost and charging more labor, but the next thing is "Joe down the road charges less per hour " and you've let yourself get bullied out of business.

[TheTrustedMechanic]

I try to re-educate the customers that price shop the parts. If I say my water pump job is $200 and they want the breakdown, the pump is $50 and the labor is $150 for example. If they respond they can get the pump for $20 I remind them they can buy an egg for .10 but the omelet still costs $10. I see your point of selling at cost and charging more labor, but the next thing is "Joe down the road charges less per hour " and you've let yourself get bullied out of business.

"I remind them they can buy an egg for .10 but the omelet still costs $10."

How does that work for you? It doesn't work for me at all. I've tried if many different ways too. "Do you take your own steak to Outback (Steakhouse) and ask them to cook it?" Then why do you ask me to install your parts? I've tried telling them that the $20.00 @ Autozone is the DYIer price, the professional, properly diagnosed and installed, warranted price is $50.00. All they see is we are overcharging them. It's not true but it is their perception.

When a consumer asks my labor rate I tell them it is irrelevant, they are not buying an hour of my time, they are buying a complete, competent and reliable repair. I then explain to them that I may charge $80 (not my actual labor rate) and the shop down the street charges $60. If I charge them 1 hour for the repair and Joe charges them 1.5 then who is cheaper? I don't know how many minds I've changed either because most are only looking for the cheapest phone price. "How much would it cost for a brake job?" It's impossible to tell because I don't know what you need, do you need pads and rotors resurfaced or pads, rotors and calipers? "I dont' know, how much is it for just pads, that's all I want." Well that is a consumer I don't want and no amount of education I can give them on the phone will change their mindset. That amount of stupid can only be changed by time and a dramatic event.

[TheTrustedMechanic]

My wife and I went to Mall yesterday to buy a gift for my grandson. We passed the men's belts and noticed a sales offer; 30% off all Belts. I stopped to look, and my wife said, "Don't you need a new belt?"

 

So, I picked a $40 belt that was marked down 30%, which brought the belt down to $28. My wife pulls out a $20 coupon, which brought the price down to 8 bucks!

 

What is the real price on the belt?....what is the cost price to the store on the belt?

 

Makes you think, right? I struggle with 10% discounts on AAA customers.

 

Is price all smoke and mirrors, when it comes to retail?

 

 

It was explained on NPR one day how retailers can sell at such deep discounts. This is only one scenario though and certainly does NOT apply to auto repair. But say a store buys 1000 seasonal units at a cost of $20.00 per belt. They then sell 70 percent of their stock for a 150% mark-up or $50.00. Then they sell 20% for a 25% discount or “sale” then they sell their final 10% for a 75% “clearance.” They would realize gross sales of $44,000 on their $20,000 investment even though they sold the last 10% at a loss.

Even selling only 50% at full price, 30% @ half off and 20% at the loss they’d still have gross sales of $35,500.

In your scenario your wife’s $20 coupon was not off a belt, it was off the average daily sale from the store’s point of view. How many customers bought their items at full retail with no coupon? We do the same in our business. I market in a local coupon book that routinely returns 4:1, 5:1 NET profit. Or like my Christmas cards last year was $20.14 off anything, even oil changes. I got 19 redemptions, 5 of which were only oil changes. One of those returned for other work with the coupon book coupon a week later. But the other 14 redemptions were all well over $100 and the final tally was almost $4000 in NET profit. So for the 5 oil changes that I lost money on, like your belt, there were many others who spent enough to make the campaign VERY profitable.

 

I’m not saying this is how the whole retail sector works, it’s just one scenario that may explain it.

[davine4real]

Trusted....that's an awesome way of thinking of it. I had a shop mentor Dave Dickinson I think, tell me a similar strategy and he is right. It's. Just a numbers game.

[stowintegrity]

We do this at our shop, as well. When we have the opportunity to do so, we will typically offer a more narrow margin on the part price, and make up the lost margin on our labor (service).

 

Someone much smarter than I once said, "Never discount your labor...it's what you do, and who you are to the customer." In this way of looking at the proposition, if I thought I was dealing with someone price-concious of the discount parts at a big-box retailer, I've often written the fair estimate, pricing the parts at as little as 10^ over the commercial "walk-in" price, and adjust the labor to ultimately reflect the same, fair price I started with.

 

The folks so focused on the price of the widget from XYZ Auto Parts will see that my itemized estimate has "the same" parts for only a little more, and the bottom line proposition is generally bolstered by the over-the-top value selling we do at our counter.

 

People only want to feel like they're getting a fair shake...so make'em feel good about you!

 

Perhaps good shops should be looking at increasing their labour margins, and reducing their parts margins, to reduce our dependence on making lots of money from parts sales.

[PAPShop]

Do you call your physician and ask him to diagnose and tell you how to fix your broken leg? No, he has to examine it to find out what all is wrong with it. We are the same way.

 

(The owner has also asked customers if they like his shirt he is wearing today. The answer is "I don't know I can't see it". And he explains it is the same with their car.)

[phynny]

Selling a part at cost is insane IMHO. I have 2 reasons for parts markup; 1. To make a profit and stay in business 2. Because I warranty that part and depending on what parts fail (as it happens to us all) we may just break even with all the previous parts we've sold that week.

[HarrytheCarGeek]

Awesome thread!

 

I stopped selling parts and labor as separate components a long time ago.

 

Went into selling "solutions" after that, which combine the parts and labor, in the invoice I price it as a "kit" or "combo special".

 

I am now selling maintenace as worry free packages. Life is good, cars don't break down as often, so I had to innovate to keep the doors open and profitable.

 

Now as far as discounts? Yes, I offer discounts to customers, but they are customized to what I have been able to distill from that customer's record with us.

 

I teach the service writers how to price those customers to keep them coming back, throwing freebies in there once in a while to keep them on their toes and coming back.

Edited July 24, 2015 by HarrytheCarGeek

[stowintegrity]

"Selling a part at cost is insane IMHO. I have 2 reasons for parts markup; 1. To make a profit and stay in business 2. Because I warranty that part and depending on what parts fail (as it happens to us all) we may just break even with all the previous parts we've sold that week." - Phynny

 

I agree completely. I often find myself openly admitting to customers that I make a profit on EVERY part I install. This is a conversation most frrequently had when talking about estimates that include dealer/OEM parts. My customers sometimes ask why, if the widget I'm getting from the dealer has a list price of $100, why are they being asked to pay more?

 

Personally, to Phynny's point, we are unashamed rto let them know that we mark up most dealer parts by 20-25%. An OEM part that has a "List" price of $100 generally costs me $75, and it's marked up to $125. Even using this method, my parts margin isn't what I can usually get on aftermarket parts, but I refuse to "give away parts". If someone is bent on wanting the part for the list price, I invite them to get the part themself from their neighborhood Dealer parts counter, and bring it to me.

 

I'm happy to install new, customer-supplied parts. My inner joy is derived from the fact that my customers are entitled to a 20% discount off ALL labor when they permit me to provide the quality parts we sell, and offer the strong warranties we have. If they provide the part, the labor discount is lost, and the warranty of the service is removed.

 

It's not generally a good idea to be mad because the $60 heater core you need installed is costing you $85 on my estimate. If you want to save the money on my fair margin on the part, you lose the warranty of the work, and end up paying MUCH mmore in labor on a job like that.

 

It warms my heart, when my customers come to the conclusion that they need to trust SOMEONE to help them, and since my practices are transparent, competitive, and fair, most of the time they end up saying the words for me: "Well, I guess since you're the people we trust, then we need to make sure we further trust the parts you're installing, and additionally embrace the "No Hassle" warranty on the parts & service.

 

They walk away assured that we'll do a great job, and stand behind our work.

 

Love your mechanic? LET HIM EARN A LIVING!

 

I need a nap.

Edited July 24, 2015 by stowintegrity

[stowintegrity]

Every reputable shop will charge a markup on the supplied parts, as well as their labor.

Edited July 24, 2015 by stowintegrity

[Joshua Rideout]

I've worked for two major retailers. One known for higher prices and low volume. They had around 50% margin but would lose money on clearance items everywhere except the department that I was in charge of and the auto repair facility. The other is known for low prices and had a 20% margin or less, and made up for it in volume. They didn't lose money in any department.

[gandgautorepair]

When we have the occasional customer come in and ask if we will install their own part, we don't argue, we just quote them 150% of our normal labor rate for that part and we tell them that the repair won't come with a warranty. If we provide the part, they will have our Lifetime Warranty on that part, then we quote the job with our normal margins. We don't win them all, but we've had a surprising number of customers let us do the whole job and they return their part for a refund, or we do the job for more labor. Additionally, if any conversation regarding parts pricing gets that far, we explain that our cost to be in business to be there for them is based on margin per hour, and it doesn't matter if that margin comes from parts, labor, or both.

[ScottSpec]

I have struggled with the customer supplied part issue for many years. This is what I do now. A friend of mine named it the "Higher Authority" response. When I get a customer that wants us to use their parts, I just tell them that I can't. I have copied and pasted our written policy below.

 

Scott’s Automotive - Customer Supplied Parts Policy

 

Unfortunately we cannot install customer supplied parts.  Our business license, as well as a number of our agreements with affiliates, requires us to have a minimum level of insurance and to provide a 24 month / 24,000 mile warranty, no exceptions.  We would be unable to meet those requirements when installing a part supplied by a customer, thereby violating numerous agreements.

By asking us to install a part you supply, you are asking us to risk losing:

·         Our Business License.

·         Our Maryland State Inspection Station License.

·         Our Maryland Tag and Title Agent License.

·         Our NAPA AutoCare Service Center Status.

·         Our Bosch Service Center Status.

·         Our RepairPal Certification.

·         Our AskPatty Certification.

·         Our Amazon Services Status.

·         Our ASA Membership Status.

·         Our ExtremeWrench Listing.

·         Our Great Reputation.

·         And most important, our relationship with YOU.