How Much Profit Should Your Shop Make on Parts?

How much profit should your heavy-duty shop make on parts? I put this one in my top five profit killers for a reason, because shops do not make enough profit on their parts. So you want to make sure you have the right price matrices assigned to the different categories of parts you sell, and that you and your team are actually using them instead of overriding them.

So in this one I want to give you the actual benchmarks, show you the difference between markup and margin (because the benchmarks are based on margin, and so are your books), walk through what a few percentage points are worth in real dollars, and then give you a short list of things to go check in your own shop at the end of this month.

The parts margin benchmarks

These are average gross parts margins for your parts department.

• Under 24%: low
• 25 to 29%: okay
• 30 to 34%: good
• 35% and up: excellent

There are shops out there getting 40% plus. I'll get into how they do it further down, and most of it comes down to how they buy.

If you're down in the 20s or under, a 10 point increase is possible, and it's possible in a lot of shops. If you're at 30 to 34 you're in good shape, and 35 plus is what you're working toward.

Markup and margin are not the same number

Before you go compare your shop to those benchmarks, make sure you're looking at margin and not markup, because they're very different and the benchmarks are based on margin.

Let's use a $100 part. You sell that part for $150. The markup on that is 50%, because you take $100 times 1.5 and you get $150.

Now look at the margin on that same part. Margin looks at the total profit out of the sale price, so of the $150 you sold it for, $50 is profit, and $50 is one third of $150. That's a 33.3% margin, on a part you marked up 50%.

So keep that in mind. The benchmarks above are margin, and that's how your financials are built too, your books show gross margin on parts, not markup.

What a few points are worth

The next thing I want to highlight is the massive difference a few percentage points of margin can make, so let's do the math.

Say your shop is doing $100,000 a month in parts, easy math, and you're at a 25% margin. Your gross profit out of that $100,000 is $25,000.

Now take that same $100,000 a month and move the margin from 25% to 35%. That's $35,000 in gross profit. Same $100,000 a month in parts, and you just put an extra $10,000 a month in your pocket. Push that over a year and it's $120,000.

And if you're a bigger shop doing $200,000 a month in parts, that same 10 point increase is $240,000 a year. That's pure profit to your bottom line.

A 10 point jump is possible in a lot of shops that are down in the 20s or under. And even a 5% increase in your gross margin can add up to tens of thousands of dollars every single year.

Build a price matrix for every category of parts

You can't make the same profit margin on dealer engine parts as you can on aftermarket brake parts. So you want different price matrices built to match the different categories of parts you sell, so the parts department stays profitable, stays competitive, and ends up at the average gross margin your shop deserves.

Stop overriding it

A lot of people discount their parts and don't rely on the pricing matrix at all. If you or your team are overriding the matrix consistently, that tells you the matrix needs work, and the answer is to go fix the matrix, not to just keep overriding the parts.

When you trust the price matrix, that's when your parts process becomes scalable, because you learn to trust what the computer tells you instead of what your gut tells you at the moment you're selling that part. And your gut is going to tell you a different price than your service advisor's gut, which is going to be different again from your service manager's. So take the gut instinct out of the decision. Work on the matrix until you can trust it, get to that 35% plus average, and your parts department will be in healthy shape.

If you want to see how often that's happening in your shop today, go look at the audit log in your shop management software. That's where the overrides show up.

How the 40% shops get there

The shops getting 40% plus are buying volume. They have good supplier relationships, and they consolidate their purchasing with specific suppliers to make sure they get deeper discounts.

A few ways to get at that:

• Consolidate your purchasing with specific suppliers to get deeper discounts.
• Look at parts buying groups. You can join one to get deeper discounts on parts than you'd get on your own.
• If you're multi-location, consolidate parts purchases across your locations, or buy wholesale in bulk, skids of parts at a time, to get that deeper pricing discount.

And this ties straight back to the matrix. When you're controlling your purchasing costs and buying wholesale to get deeper discounts, you can confidently increase your price matrices on those categories of parts.

The month-end parts check

Here's what I want you to do as a shop owner. At the end of every single month, track your gross margin on parts. Open up your shop management software, look at your actual gross parts margin for the last 90 days, and if it's below 30%, start digging into why.

• What's your actual gross parts margin for the last 90 days? Margin, not markup.
• Do you even have price matrices, and are they split into different categories?
• Are you putting different margins on different categories, with a different matrix for each?
• Look into the audit log. Are your parts prices being overridden?
• Are you controlling your purchasing costs?
• Are you trying to purchase wholesale to get deeper discounts, so you can confidently raise your matrices on those categories?

If the margin number comes back under 30, those are the questions to dig into. And remember, even a 5% increase in your gross margin can add up to tens of thousands of dollars every single year.

The pushback I hear, and what I'd say back

"Our margin is low because we sell a lot of dealer engine parts." That's exactly why you need more than one matrix. You can't make the same margin on dealer engine parts as you can on aftermarket brake parts, so build different price matrices for the different categories of parts, and that's how your parts department stays profitable and competitive and ends up at the average gross margin it deserves.

"My guys know the market better than a matrix does." Your gut is going to tell you a different price than your service advisor's gut, and your service manager's gut is going to say something else again. So remove the gut instinct from the decision. If the matrix is wrong, work on the matrix, and once you trust what the computer tells you, that's when your parts process becomes scalable.

"If we raise prices, we'll lose jobs." Different price matrices for different categories are built to keep your parts department profitable and competitive at the same time, that's the whole point of them. And the number one reason customers leave a heavy-duty shop is communication. It's not price.

"We're one location, we can't buy volume." That's what parts buying groups are for. You join one to get the deeper discounts you couldn't get on your own.

The bottom line

These benchmarks are critical if you want to run a high performance shop. Build a price matrix for every category of parts you sell, stop overriding it, buy smarter so you can raise it with confidence, and check your gross parts margin at the end of every month.

If you're sitting in the 20s today, 35% is not out of reach, and the difference is tens of thousands of dollars a year on parts you're already selling. Go open your software and pull the last 90 days. That's the whole first step. Once the parts side is healthy, the fastest way to grow your shop is the next thing to read.