Not sure where to start? Read out guide below on how to reach your profit goals by setting the right prices for your parts.
What is a parts margin?
Margin is the difference between the price you are selling a good or service, versus the costs you have incurred to provide the good or service. In the case of parts, this is the price a customer is purchasing the part for versus the price you paid. For example, a screw cost you $0.30 but you charge the customer $0.75, your profit margin is 60%.
Monitoring the margin of your sold parts is one way you can keep track of the profit your making. With the right system in place (even a chart on the wall) you’ll begin to see just how much profit is being made on each job and adjust prices before sending off invoices.
Are all parts margins the same?
The short answer is no. At SAM we look at the part category and set a margin based on this. Two examples of parts categories are “Stocked Parts” and “Procured Parts Margin”. Most workshops would set the margin for a procured part higher because more time and effort has gone into getting that part into the workshop, whereas a stocked part is likely to be something that you use often and have in stock in high quantities. The table below outlines the differences.
|Stocked Parts||Procured Parts|
|Quantities in stock||These parts tend to be used a lot so you have a lot on hand in the workshop.||Low to none at all. That’s why you need to procure them.|
|Quantities for purchase||If you need a high quality in stock then you need to be ordering a lot at a time.||Usually one off purchases just for the job.|
|Bargaining power||Ordering in high quantities means you get the benefit from economies of scale and discounts for large orders.||Low, infrequent orders and small orders mean getting discounts is harder.|
|Time and effort||Time and effort to order stocked parts in low since you order them a lot.||Finding the right part takes more research and administration time, especially if it’s from a supplier you don’t normally use.|
|Cost price||Usually low price to order and high opportunity to mark up.||Usually high cost to order and low opportunity for markups.|
|Margins||Will a customer notice a 50% markup on a couple of nuts when you’ve paid $10.49 for 5? No. Will you notice the difference after you sell 100 over the month? Yes.||While it takes more time and energy to get these parts in, the overall cost is usually high and a 50% markup on a Nissan ZD30 Cylinder Head isn’t going to go down well with your customers.|
What is a “good” parts margin?
This can be a difficult question to answer, as we’ve said in the table above what’s “good” to you probably isn’t going to be “good” for your customer.
Let’s start by looking 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 category of part, see the chart below.
Interestingly, this data hasn’t changed much from year to year.
What part does labour-to-parts ratio play?
This measure is key for showing you where your sales are coming from. Many workshops work on the 1:1 rule, selling $1 of labour for every $1 of parts. In recent years there has been a change in the ideal ratio with recommendations to sell more labour than parts and the ratio has been adjusted to 1:0.66.
Why? These days cars now take more time to diagnose the problem, and fewer parts are required to fixing the problem. That means for every job you’re working you’re making less money because you’re selling fewer parts.
Calculating this ratio will help you in determining whether or not your parts margin is healthy.
Pricing to scale with the matrix
As we’ve said above, different parts categories have different profit margins because they require different amounts of time and effort. Don’t get us wrong, it would be a lot easier to just have a blanket margin on all your parts, but we can’t compare apples to apples when it comes to a screw and an engine block.
For example, would you apply a margin of 50% on a big-ticket item, like a full OEM engine replacement? No, but it’s well within reason to do for something like oils or filters.
The first step to creating your own pricing matrix is to categorise your parts based on the type of product, such as oils or filters, or slow-moving items.
Next we create a table where we plot these categories on a matrix based on quality and price. The square your categories fall into will determine the margin.
|Cost of part||Mark up (%)||Gross profit %|
|$0.01 – $5.00||100%||50%|
|$5.01 – $10.00||75%||43%|
|$10.01 – $20.00||50%||33%|
|$20.00 – $50.00||45%||31%|
|$50.00 – 250.00||40%||29%|
Hooray for automation making our life simpler! With a decent workshop management system you’ll be able to apply categories to the stock in the software.
In the backend you’ll have settings where you determine the margin for each category. Now, do you see why we’re making you do the matrix above?
By adding the margins to the categories in the settings, this margin will be automatically set every time you add a new part to a certain category and you don’t need to think about it again. Until the end of the month when you want to review your profits anyway.
Adjusting margins on a job by job basis
While the automation is awesome, human error does happen so we always recommend double checking the margins on each job before you process an invoice. In SAM you’ll see a button that says “Margins” or in webSAM you’ll have a button that looks like a little line graph.
Using this little button will help you check your profits on a job by job basis, and if the margin doesn’t look high enough for the job that’s been done then you can adjust the charges before you send the invoice to client rather than seeing your profits lower than expected at the end of the month.
Keeping track of your margins
It all starts with writing it down, so we’ve created a handy little spreadsheet to help you get started tracking your parts margins, the markups and your average gross profit.