Creating a Parts-Pricing Matrix
Despite not being a new concept, the use of parts-pricing matrices is still all over the board in dealerships, Mike Volkman says. As the president of Service Department Solutions, Volkman is in and out of service departments across the country, helping those departments increase profitability. And, he says one way to do that is by creating an effective parts matrix. The reason you want to do it is simple, he says: In most states, the law stipulates that manufacturers must reimburse at retail rates. What happens is that the standard 40 percent markup results in only a 28 percent gross profit margin.
“If I can average 67 percent markup, then I can take my gross profit margin up to 40 percent and I can earn 12 points of gross, which is a big gain,” Volkman says. “If I have $100,000 and I can take the manufacturers up to 67 percent markup, I’m adding another $69,000 to the bottom line. It’s all free money.”
The issue, he says, is that dealership parts-pricing strategies are rarely changed or reviewed.
Volkman explains the steps to creating an effective parts-pricing matrices and the various factors to consider.
Most manufacturers on most parts, when you buy a part for $1, they give you 67 percent markup, which is 1.67. That’s a 40 percent gross profit margin. When you buy maintenance parts, depending on what it is, it might be a 25 percent markup. Where you need to be careful is rolling maintenance items into the customer-pay line on a financial statement, which erodes gross profit margins. If you’re looking at a financial statement where those are combined—rather than a straight customer pay line, repair shop line, etc.—that dealership will have a 30 percent gross profit margin. That’s how you tell whether you use matrix pricing or not.
The manufacturers are going after the FTC and trying to get them to say that they only have to reimburse the dealer at suggested retail price, which is that 67 percent markup that they control. The profit margin between the cost of the part and the retail sales price are slowly eroding. You’re selling the same amount of parts but since there’s no gross profit because the markups eroded, your boss comes to you and says, “You’re not selling any parts; there’s only $50,000 in gross.” You might be selling more parts, but they’re not holding the markup the same. Whenever you utilize matrix pricing, you control the markup.
We find most people buy parts between $0 and $250. That’s where your matrix should be set up.
Here’s a soft matrix that I recommend:
- $00.00–$20.00 = 150 percent
- $20.01–$50.00 = 100 percent
- $50.01–$75.00 = 90 percent
- $75.01–$250.00 = 75 percent
- $250.01 and up = 67 percent
The most you should hold is what you can get for your area. If you’re in a dealership, they expect to pay higher prices but they also expect the higher quality service. I have some dealers in Virginia who are in a high-class area and they charge their customers 100 percent markup. If you’re in the hills, you’re going to have a hard time getting 67 percent of it.
What happens at the parts counter with matrix pricing is the counter people believe all parts should be matrixed. Not true. The only parts that are matrixed are repair shop parts for your customer pay and your counter retail. It doesn’t include the maintenance/competitive parts or wholesale.
On maintenance parts, such as oil filters, brake filters or fuel filters, you can’t mark them up 200 percent because no one is going to pay $20 for an oil filter that’s worth $5. However, this happens all the time and it’s generally a mistake.
Your wholesale parts customer is someone who purchases a heavy volume of parts and is not a fleet customer. It’s not someone who buys several trucks off you; they don’t get wholesale pricing. It’s vital that within your DMS, you have a ledger set up with all the wholesale customers and purify that list every year. Make sure people who are wholesale are really people who purchase volume off you.
Many service guys think if they get an objection, they’ll lose the wholesale customer. The wholesale customer is not fed up. You can go in when you bill the parts and determine the correct price based off your different levels: Internal, Regular Retail, Wholesale Level 1, Wholesale Level 2. There are different matrixes of how customers are priced inside the system.
When they’re setting up pricing, counter retail would be just one matrix pricing. If your parts mark up is 67 percent, but you’re marking up 100 percent, you times it by 200. Your DMS should do all of that for you. When you look at the system, it tells you the dealer cost, what you paid for the part, the list price (MSRP) and the selling price.
Finally, you’ll want to set up proper sources to determine how to price parts. For example, if a part comes from Ford and you’re a Ford dealer, that would be your main Source 1. But your fast-moving maintenance parts would be Source 2. You put accessories into Source 3 and tires into Source 4, because those are different prices and not going to go by matrix pricing. You have to have numerous sources set up.
Within your DMS, check your price codes and how they’re being used. Also, check the override reports daily, which can pinpoint any discounts and pricing issues.
What happens is the OEM comes out and gives you price tapes. When they give you those, it’s going to change the list price. This way when you apply the matrix, you only apply it to repair shop parts, which is Source 1/Tier 100, depending on the system.