Understanding parts margins

Confused about parts margins? Read our guide below to get the low down getting the right margin for your workshop

What is a parts margin?

Margin is the difference between the price you are selling your services for, vs the costs you have incurred to provide the services expressed as a percentage. In the case of parts, this is the price a customer is purchasing the part for vs the price you paid. For example, a screw cost you $0.30 but you charge the customer $0.75.

The margin on the cost of the screw can be calculated by: ((Sale price – Cost price ) / Sale price)*100% 

Monitoring the margin of your parts sold helps you to keep track of the profit your making. If you don’t already do this, we recommend you start thinking about your ideal parts margin so you can take action when you see your margin dip below the target. While the basic equation is the same, when analysing parts margin it is good practice to separate figures into 2 areas, Stocked Parts Margin and Procured Parts Margin. 

Stocked Parts Margin = ((Stocked Part total sales - Stocked Part total cost) / Parts total sales)*100%

Procured Parts Margin = ((Procured Parts total sales - Procured Parts total cost) / Parts total sales)*100%

We analyse these separately because they need require different pricing strategies. For example, you can improve margin on stocked parts by securing bulk supply discounts when replenishing stocks, but procured parts, i.e. parts that are ordered in low volume for a specific job on hand, your ability to reduce baseline costs is in pre-defined price agreements with your suppliers or for those with the time and inclination, in your ad-hoc ability to negotiate a better price when sourcing the required component.

What is a "good" parts margin?

To understand "what is good", let's look at what the rest of the industry is doing.  In 2019 the average part margin across NZ MTA members was 41%, so for every $10.00 parts sale, the average workshop was making $4.10. Or to break it down by the type of part, see the chart below.

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The data doesn't change a lot quarter to quarter across the year, showing that the price of parts hasn't fluctuate based on time of year.

Labour-to-parts ratio - A key measure of "good" is the labour to parts ratio, this tells us where the majority of our sales are coming from. When parts sales are substantially lower than labour sales, this can indicate that your mark-up percentages may be too low. Some resources recommend trying to maintain a 1:1 ratio, the latest advice has been to go down as far at a ratio of 1:0.66. Why? Modern vehicles are requiring more diagnosis work as they become more complex, so fewer repairs are required meaning fewer parts. To keep profits up labour sales will be key. 

Pricing to scale

While it’s tempting to apply the same mark-up to your entire product range to save time, each product type should have a margin based on the type of product, such as oils or filters, or slow moving items.  Once you have defined your categories, use a pricing matrix to determine a suitable margin based on the quality of the product and therefore the value that your customers are likely to see in it.

Automated margin multipliers - Alternatively, consider applying tiered margin percentages, scaled with low priced/bulk supplied products set to a higher margin rate with high-priced procured-parts at the opposite end of the scale, with lower margins applied.  You’re going to be very unlikely to win the job if you double your margin on a big-ticket item, such as a full OEM engine replacement; but on small items you order in bulk such as oils or filters, doubling or even trebling the margin is well within reason.

Your Workshop Management System will allow you to set up automated tools to simplify this process, setting different margin multipliers over the product categories for your bulk supplied products, so when new products falling into these categories are brought in, your tiered margin structure is automatically applied to the sell price based on your cost price. Before you finish a job and create an invoice, we recommend double checking the margins.

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Adjusting margins on a job by job basis - When using a WSM it's easy to miss a decimal point or input the wrong number. Using the margins button on your system, you can quickly check for any human errors in the process and catch a potential loss.

Monitoring your margins

Download our excel template to track the markup %, margion %, average quantity sold per month and your average gross profit. Get started tracking your parts margins now

 

Looking for an easier way to manage your pricing for parts? Get a Workshop Management System that takes the hassle out of manually managing parts margins. Request a call back from the SAM team to find out more about how we can make your job easier.