For auto shops big and small, the parts department plays a crucial role in keeping things running smoothly. Those that master the process of balancing the right parts with great management see improved efficiency and increased revenue.
The next step is learning how to optimize your parts markup and parts margin. By doing this, you’ll be able to take your inventory-related benefits to the next level. But knowing the correct definitions and calculations is vital.
Before taking steps to optimize your parts markup, you’ll need to learn a bit about the concept of markups in general. A profit markup simply refers to the amount by which businesses increase an item’s cost to reach its final sale price. If you were to take a $70 product and sell it for $100, it would have a markup of 42.9%.
The higher a part’s markup is, the more money you can make from selling it at its retail price. But applying markups isn’t as simple as it may sound, as products in different price ranges need different markups. For example, think about a $1 lug nut and a $200 tire. With a 20 percent markup, the lug nut would cost $1.20 - a price increase that’s barely worth the trouble. On the other hand, applying the same markup to a tire would result in a cost of $240, so you could reduce your markup by 5-10% in this scenario.
Parts markup and parts margin are similar in some ways–they both take revenues and costs into account. However, these concepts are far from identical. Unlike profit markups, profit margins express your sales revenue minus your price of goods sold.
Let’s look at the first example in the previous section again. While our $70 item has a markup of 42.9% to reach its $100 retail price, its profit margin isn’t quite as high in this scenario–after all, this product sold for $100 but cost $70. As a result, we get a margin of 30 percent.
The Formula Matters
Even if your shop has a point-of-sale (POS) system that handles pricing automatically, you may sometimes find yourself in situations where employees need to calculate auto part prices manually. At times like these, knowing the difference between markups and margins–and how to calculate both–is essential.
Since a 30% profit margin is considered excellent for resale, let’s say you wanted to sell an auto part that cost $100 with this margin. If you aren’t careful, you might think the way to calculate this is to multiply the part’s cost by 1.30, resulting in a price of $130. This price is certainly higher than your costs, but it’s not what you’re looking for–this method is for finding markups, not margins.
Calculating margins is slightly more complex than calculating markups, but the extra work can pay off. You can start by subtracting your ideal markup percentage from 100 percent. Then, you divide the cost of the part by the remainder. For the example shared here, you’d divide $100 by 0.70 (or 100 percent minus 30 percent). With this method, you’d get a result of $142.86!
Another vital skill is knowing when to use margins and when to use markups. While setting a single margin for all your products may be tempting, a flat rate markup can actually be more profitable for less expensive items.
By knowing how and when to find parts markup and parts margin, you can increase your revenues without setting exorbitantly high prices. With that said, using these concepts isn’t a one-time job. Instead, you’ll need to keep a watchful eye on your sales to see if and when you need to make pricing adjustments.
In many cases, making improvements to your POS system can help–especially if these adjustments can fit seamlessly into your existing pricing system, like BayIQ’s. Along with sales tracking, BayIQ’s POS software is capable of tracking everything from cars in your shop to the parts you have in stock.
If you’re ready to take your auto shop’s POS system to the next level, BayIQ can help. This automated marketing software is built for the auto and tire industry, making it the ideal choice for independently-owned shops like yours.