How a Parts Pricing Matrix Can Increase Profitability
Do you struggle to price your parts? Are you not sure how to create profitable parts margins, while remaining competitive? You are not alone.
Financially healthy shops typically sell parts for more than they paid for them – that much is obvious. But it can be a real challenge to determine how much each part should be marked up. There needs to be a balance between your business goals, and customers’ willingness to pay, and that balance can be hard to strike.
Shop owners also often express concern about making the markup process as painless as possible, since it can be a manual task that takes time and effort away from the rest of the business. Thankfully, with modern technologies and a bit of know-how, accurate pricing doesn’t have to be daunting.
The increasing importance of accurate parts pricing
Utilizing accurate parts pricing models is especially important in today’s auto repair shops, as workloads shift to more maintenance work and less repair work.
The increased reliability of more modern vehicles, both ICE and EV, means part replacements is an ever-more essential driver of shop profitability, as repair orders increasingly include more consumable parts and fewer labor hours. But often, when shops think of key revenue drivers, they focus on labor vs. parts. This can be a costly error.
Increasing the urgency of having an accurate parts pricing structure is the fact that many suppliers are moving from yearly pricing changes to biannual or even quarterly shifts in pricing. To keep pace with these changes, you need a sophisticated parts pricing strategy, and the ability to monitor it and make shifts quickly to maximize profit. A price matrix is an important part of this strategy.
What is parts matrix pricing, and how does it work?
Matrix pricing is a system where you take a part’s initial cost and multiply it by a certain amount to determine the selling price.
For example, a $2 taillight bulb can be marked up four times to create a selling price of $8. However, the same markup can’t be used for more expensive items, like a starter that costs $250 since the selling price would be $1,000.
A typical parts matrix reduces the markup as the part gets more expensive. This is called a stair-step approach. Here’s a quick example of how that works:
Shops often utilize an Excel spreadsheet to create their shop’s parts matrix, but this approach has some serious downsides. Using a spreadsheet to markup parts is time-consuming since each part used for a job has to be marked up manually and usually results in leaving money on the table. More efficient shops prefer a software system to apply their parts matrix and build repair orders.
Shop management software can automatically mark up the price of a part based on the Parts Matrix with minimal setup time. By automating the markup process, shops save time and reduces human error while ensuring the customer is charged appropriately.
The downside to stair-step price matrixing.
A basic parts matrix system offered by most software works fine; however, a problem arises when a part cost crosses into another price range. This can happen when your usual parts supplier is out of stock, and you must order from a more expensive supplier.
For example, using the parts matrix above, a part that costs $4.99 falls into the second tier and would be marked up three times for a selling price of $14.97. But let’s say your usual supplier is out of stock for that part, and now you must purchase the same part at $5.05 from another supplier.
Based on the matrix above, the $5.05 part falls into the third tier and would only be marked up 2.5 times for a selling price of $12.62. That part costs 5 cents more and now sells for $2.35 less. Over time, these little pricing issues can add up to major revenue loss.
A Smarter Approach to Price Matrixing, from R.O. Writer
To avoid losing profit in these scenarios, R.O. Writer has a Smart Matrix feature.
Rather than a stair-step approach, R.O. Writer uses a curved approach. The Smart Matrix feature smooths out the steps and lost profit of a typical matrix.
Owners can create an unlimited number of matrices to fit different scenarios. For example, owners can create a matrix for specific part categories, supplies, parts in stock vs. non-stock parts, or different types of repair jobs.
Accurate pricing is the foundation of your auto shop’s success
Independent repair shops rely on revenue from both parts and labor to remain profitable, but often parts pricing takes a back seat to other activities at the business.
That’s why investing in auto shop management software with an integrated price matrix can really boost your bottom line.
With the right tools and some attention to detail, you can strike the correct balance on part prices during every car repair. You’ll be able to ensure that your price points always take into account market dynamics, customer satisfaction, and your business goals, putting you on the path to success.
