What You Need to Know to Calculate Retained Gross Percentage
Retained gross percentage. It’s arguably one of the most important numbers in a parts department. It’s the the number that shows the percentage of each dollar of revenue that it retained as gross profit. The basic goal of any business is to earn the most profit possible, which is why it’s essential that everything possible is done to make this number as high as it can be.
In the parts department, that means finding the right markup percentage that’s not too high to discourage customers from purchasing and not too low that the department is turning minimal profit.
Tim Price, the director of parts operations for Ganley Westside Imports in North Olmsted, Ohio, oversees three parts departments for Hyundai, Volkswagen and Subaru and has three parts manager that report directly to him—so it’s essential that he understands the ins and outs of parts pricing. Price shares how he calculates his retained gross profit percentage and the factors that go in to it.
A benchmark to reach for:
The industry benchmark for retained gross percentage depends on the dealership’s different car lines, and customers. For example, if the department is part of a Volkswagen dealership and there are four other Volkswagen dealerships within a five-mile radius, a benchmark to hit would be 40 percent in order to stay competitive.
Forty percent has been considered the industry standard for an average Volkswagen department for years, he says, and Volkswagen manufacturers still use this to calculate suggested retail prices.
A manager needs to take into account that the benchmark might need to be lowered to be competitive in the industry.
If a profit is inadequate to cover expenses, a way to achieve a higher gross profit is through matrix pricing. Price says most dealership management systems have this option and gives the manager the ability to adjust the gross percentage for a range based on either the cost price (items costing between $100 -$200 get marked up 40 percent while items costing $5 - $10 get marked up 100 percent) or the list price (items with a list price between $50 - $100 have $10 added to the list price).
He uses the process of matrix pricing in lieu of the manufacturer’s list price because some manufacturer’s prices could skew higher than a customer would expect to pay for that type of brand.
Matrix pricing is a process in which parts that are sold between $100 and $200, for example, are marked up 60 percent but for cheaper parts, say $5, are marked up roughly 200 percent.
One aspect of pricing and calculating the profit is to keep in mind how much a customer might pay for a part for a high-end car versus a part for a budget-line car, he says. Sales may benefit from less aggressive pricing on lower-end parts.
How to calculate retained gross percentage:
In order to calculate gross profit percentage, there are a number of pieces of information you’ll need. First, you’ll need to know what the cost of the part is, which is easily obtained. After that, if you have identified the need for a higher profit, you can make a few calculations.
Gross profit formula:
Price part is sold for − price the part was purchased for = parts gross profit
For example, if a part cost $10 and is sold for $16.70, the part gross profit would be $6.70.
Now, you can find the retained gross profit percentage.
Retained gross profit percentage:
Gross profit / sale amount = retained gross profit percentage.
Using the above example, $6.70/ $16.70 = 40 percent retained gross profit percentage
Pricing a part to get a specific gross profit percentage:
You can also work backward and figure out the price the part needs to be sold at to get a specific gross profit percentage.
Formula= Price of part x desired gross profit percentage
Gross profit percentage have markups associated with them, which Price provides below.
Margin Cost X %
15 % 1.18
20 % 1.25
25 % 1.34
30 % 1.43
35 % 1.54
So, if you’d like a 40 percent markup on the part that costs 10, you would take $10 x 1.67, which would be $16.70.
What to use to calculate retained gross percentage:
“I used to have to sit down with a pencil and piece of paper and figure out what to do,” Price says.
Now, a parts manager has the option to use a customer relations management program to form the calculations. Some of the programs will scan the parts inventory, look at the sales, and then generate spreadsheets that tell which customers are active and which are declining.
“You’ll be able to market to them differently based on the status,” Price says. “For inactive customers, you will know that you can offer them a discount.”
What to remember if just starting out in calculating for parts:
A manager should first get some experience under his or her belt before attempting to tweak the calculation, Price says.
“If it’s your first week on the job as parts manager, then get some history under your belt,” he says. “Sell parts at a standard rate and sell wholesale parts at a standard discount.”
Managers can wait up to a month before marking up the parts prices, he recommends.