We see many heavy truck shops that underprice their parts. A lot are not getting the profit margin they need (and may not even be covering their costs). Some picked a markup percentage long ago and just stuck with it. Others feel bad about making any profit on parts.
Don’t fall into these traps. Heavy duty shops have to be deliberate in pricing parts–good parts pricing won’t happen on its own. You’ll see customers complain when parts are priced too high, but never when they’re too low.
Making a profit is how you survive. If you don’t make a profit on parts you have to make it up in other areas. As we discuss in our shop profitability article, even the nuns that founded St. Joseph’s Hospital in Phoenix baked a profit into all the work the hospital did. They followed the mantra “No Margin, No Mission.” So if even a charity needs a healthy margin to keep the doors open, don’t you?
If you want your shop to survive and thrive, you must make a healthy profit on your parts. This article discusses how heavy truck shop parts pricing should work. Follow our guide below to figure out where your heavy duty parts should be priced.
Heavy Truck Shop Parts Pricing and You
When hashing out how to price your heavy duty truck parts, follow these four points:
- Know your numbers: Add up your costs so you know how much needs to be covered
- Do the math: Start with the profit you need and back into a parts markup percentage
- Be reasonable: Charge a higher markup for lower-priced parts
- Save your energy: Use shop management software that calculates markup for you so you don’t have to think about it every time
1. Know Your Numbers: How much cost needs to be covered?
Your total cost on parts shouldn’t be any higher than 25% of sales. The chart below shows how every dollar of sales, on average, should be allocated in your shop. (30% to pay techs and managers; 25% to buy parts; and 10% for overhead. What’s left is your profit.)
Anything higher than this 30/25/10 mix eats directly into profit. So if your cost on parts is above 25% of sales, you either need to charge more or cut your costs. Ways to cut costs include negotiating prices with suppliers and keeping inventory low.
The rule of thumb is that it costs you 20% a year to carry inventory. So if you have $60,000 in inventory, it is costing you $12,000 a year to carry it. This covers the opportunity cost of the money tied up in inventory, cost of the parts room, insurance, obsolescence, and theft.
Cultivate a good relationship with your parts suppliers and constantly work on getting better pricing. Your shop management software should show which vendors you throw the most business to. Leverage these statistics to get better pricing. Your software should also make parts ordering very accurate. Vendors are more likely to give you a break on pricing if your parts return rate is low.
2. Do the Math: Back into a parts markup percentage
A heavy duty diesel shop should be making 35% profit after covering labor, parts, and overhead. If your profit is below 35%, there are adjustments you can make to get there. (Read more about this in our article on diesel repair shop profitability.)
To achieve 35%, your profit on parts and labor actually needs to average 45%. That is because of overhead. After covering 10% overhead you will come in at your target of 35%. If your profit on labor is higher than 45%, you can afford to make less profit on parts. If your profit on labor is less than 45%, you will need to make it up on parts. Heavy truck shop parts pricing done right will keep your profit where it should be.
Be careful not to confuse profit and markup. If you need a 45% profit, does that mean you mark your parts up 45%? No! Profit and markup are not the same thing. Many shops fall into the trap of assuming they are. To achieve a 45% profit, you don’t mark your parts up 45%; you actually have to mark them up 81.6%.
Use the table below as a guide in converting profit to markup. Find your desired profit. Next to it will be the markup you will need to achieve that profit.
By the way, if you want to build this table yourself, the formula to convert profit to markup is: Profit = Markup / (Markup + 1). Read more in our profitability article about how to reduce the cost of parts.
3. Be Reasonable: Charge a higher markup for lower-priced parts
Now you have an idea of what your markup percentage should be. Let’s say we’ve chosen 82% to get us a profit of 45% on our parts. Does this mean you charge an 82% markup across the board?
Consider the case of two parts: a $5,000 engine core and $5 wiper blades. You would get run out of town trying to charge an 82% markup on the engine core. But you could probably justify charging more than 82% on the wiper blades.
In other words, you should charge a higher markup for lower-cost parts, then gradually reduce the markup as the parts get more expensive. Heavy truck shop parts pricing should be on a graduated scale, using a parts pricing matrix.
Here is an example of a graduated markup scale.
4. Save Your Energy: Your shop management software should calculate the markup
Don’t wait until the heat of the moment to do your parts markup. Your shop management software should do the math for you on the fly. The software should allow you to set up a graduated pricing scale or pricing matrix, so you can charge a higher markup for lower-priced parts. It should also let you modify the selling price after markup is calculated, in case you need to make a final adjustment.
Heavy truck shop parts pricing should be automated like this due to the shear volume of parts coming through the shop. If you wait to calculate markup every time, you’ll spend energy doing the math on markup that you could be spending more productively. Do the math once, then let your shop management software do the work for you going forward.
With a little effort upfront, parts will be a steady source of profit to your shop. With the right tools, heavy truck shop parts pricing will help you achieve your profitability goals.
We built Fullbay to drive consistent, predictable profitability on parts in your shop. It also runs the front and back office areas of your shop. Visit our demo request page or fill out the form below to see Fullbay in action.