Heavy duty repair shops have two goals: to offer a valuable service and to make a profit. If your shop doesn’t achieve the latter, it won’t be open very long to provide the former. One fatal mistake many shop owners make is the way they price parts. Some got used to a simple percentage markup structure long ago and have never bothered to make a change. Others may feel that their profits should come from the service they perform, so they basically pass on the cost straight across with no parts markup.
The shops in both cases are leaving profits on the table, and they likely don’t even know what’s causing their anemic bottom lines. A fresh parts markup strategy is the solution for taking heavy duty repair shops from barely surviving to effortlessly thriving.
Parts Cost More Than What’s on the Invoice
There’s a reason that simply marking up parts by a percentage—50%, for instance—doesn’t typically result in healthy profits. It’s because that basic formula doesn’t account for hidden costs the part carries. Also known as burden rate or overhead, those costs include everything involved in ordering the part. They’re things such as time, a computer, Internet connection, electricity, and a phone. If your shop keeps parts stocked, there’s also the cost of space to store them until they’re needed. Plus, don’t forget other overhead costs like:
- unused parts that are outdated
That means that a part that the vendor charges $100 for could end up costing $120 or more after your parts manager orders it and stocks it on the shelf.
Parts Markup Strategies
Rather than taking a hit-and-miss approach to profits, it’s best to have a plan. There are several parts markup strategies you can use. For instance, you could aim to make a certain percentage in profit. In general, heavy duty repair shops should make around 45% in profits on parts, so your parts markup would be based on a 45% profit margin.
Alternatively, you could go with volume-based pricing. For that strategy, you take a higher markup on slow-moving inventory than on parts with high turnover. Another approach is to charge more markup on low-priced items. For example, a bolt or bracket might only cost you .50 cents, but not many people know what small, low-priced parts like those cost and they typically don’t care. You’ll find customers are more concerned with big-ticket items rather than haggling over parts that cost a few dollars. That means you could easily charge $2.50 for that .50-cent part, which translates into an 80% profit margin.
Calculating Parts Markup
Once you know how much you want to make, you can work back from there to determine a profitable parts markup. Here’s a formula for calculating a parts markup that will return a 45% profit:
full cost of the part/(100-target profit margin)100=what you charge for the part
With a target profit margin of 45%, you would divide the full cost of the part by 100-45 which is 55, then multiply that answer by 100. Therefore, plugging in our $100 part example ($120 fully burdened) gets us a parts markup of $98.18:
Naturally, you can use different percentages for the target profit margin if you decide not to mark up all parts the same. Applying this equation to each part you sell will guarantee a consistent profit. Plus, it keeps your shop competitive while ensuring you don’t get a reputation for over-charging.
Of course, doing the math every time you create an estimate or invoice can be more of a mental workout than most people want to do. Although it’s important to understand how effective parts pricing works, good shop management software does the calculating for you. It works well with any parts markup strategy because it saves time and, in the end, that increases profits, too.
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