Many auto shops leave between $40,000 and $70,000 per year on the table due to insufficient parts markup practices.
Cecil Bullard, Owner and CEO, The Institute for Automotive Business Excellence
67% of shops leave money on the table when it comes to gross profit on parts.
Is your auto repair business leaving profit on the table due to improper parts markups and margins? A recent PartsTech survey of 618 auto repair shop owners and managers across the U.S. found that 67% are missing out on significant profits due to insufficient markup practices — potentially costing shops between $40,000 and $70,000 annually. This guide, created in collaboration with The Institute for Automotive Business Excellence, will help your shop increase profits by implementing a parts markup strategy and matrix.
Parts markup matrix – what is it?
A parts markup matrix is a strategy-based formula for pricing parts. It guides the markup on purchased parts to ensure a healthy profit margin on every repair order. It typically applies higher markups on lower-cost parts and lower markups on higher-cost parts to achieve a targeted overall margin.
Why a parts matrix is a must-have?
Implementing a customized parts markup matrix is essential for profit, as standard list prices or flat markups won’t achieve healthy margins. This strategy ensures prices align with your services, protecting margins and enhancing profitability.
Benchmark matrix by part cost
This is a sample matrix from The Institute for Automotive Business Excellence that you can use as a starting point to mark up your parts. Use the strategy guide below this matrix for tips to adjust it based on your unique shop.
| Part Cost | Markup Multiplier | Approximate Profit % |
|---|---|---|
| $0 to $2.50 | X 4.00 | 75.0% Profit |
| $2.50 to $5.00 | X 3.75 | 73.3% Profit |
| $5.01 to $10.00 | X 3.00 | 66.7% Profit |
| $10.01 to $50.00 | X 2.75 | 63.6% Profit |
| $50.01 to $100.00 | X 2.50 | 60.0% Profit |
| $100.01 to $150.00 | X 2.20 | 54.5% Profit |
| $150.01 and $200.00 | X 2.00 | 50.0% Profit |
| $200.01 and 500.00 | X 1.85 | 46.0% Profit |
| $500.01 and Up | X 1.70 | 41.1% Profit |
Experience a parts matrix in action
Change the markup multipliers in the sample parts matrix below to see how gross profit is impacted
in real-time within the mock shopping cart
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Parts markup – a breakdown
Parts markup or markup multiplier: The percentage or multiplier by which the cost of the part is increased to arrive at the selling price.
Parts margin: The profitability of selling a part (calculated as a percentage). How to Calculate.
Selling price: The final amount charged to a customer for a part. How to Calculate.
Gross profit on parts: The total revenue generated from selling parts minus the cost of those parts to your shop, indicating the financial gain from parts sales before accounting for other expenses.
How to calculate your gross profit on parts
(Total Sales – Cost of All Parts Sold) ÷ Total Sales = Gross Profit on Parts
How to create a parts markup strategy
Step 1: Determine the overall gross profit you need on parts
Aim for a target gross profit. The Institute’s auto shop coaches recommend 58%. This initial step sets the foundation for your pricing strategy, ensuring you cover costs and achieve desired profitability.
Tip: Understand your inventory
Be aware of the different types of parts you sell and their costs. This knowledge is crucial in setting accurate and profitable pricing strategies.
Step 2: Implement and adhere to a matrix, adjusting It as needed
After determining your gross profit target, the next step is to set up your pricing matrix and use it consistently across all parts and services.
Tip 1: Get started with a cost-based parts matrix
Once you start to flex your markup muscles more, you can implement multiple matrices based on aspects such as different part types and tire brands.
Tip 2: Competitive pricing adjustments
If necessary, selectively reduce prices on some parts to remain competitive, but ensure you adjust other parts’ prices upward to maintain your overall profit margin.
Tip 3: Maximize your markup
Use the higher of the List Price or your markup. In cases where the wholesaler list price significantly exceeds your markup, find a middle ground that offers value to your customer while enhancing your margin.
Tip 4: Incremental increases
For standardized services (e.g., oil services), even small increases can contribute significantly to overall profitability without alienating customers.
Step 3: Review and adjust the matrix regularly
It’s important to continually monitor and adjust your pricing matrix monthly or quarterly based on the actual parts margin your shop achieves each month. This ensures you consistently meet or exceed your profit goals.
Tip: Pay attention to opportunities for additional margin
Look for opportunities to make an extra margin, especially on parts where there’s a significant discrepancy between the wholesaler list price and your marked-up price. Offering a competitive deal to your customers while improving your margin on these parts can help balance overall profitability.
Important tip: Leave emotions out of parts pricing
Don’t let emotions or customer concerns over costs deter you from standing firm on your parts markup. Your shop adds high value to the parts through warranties, guarantees of fixed vehicle issues, proper fitment, and expert installation — justifying your worth.
Consider taking a sales class to identify your unique sales proposition (USP) and reasons for pricing higher than competitors or online stores. Recognize the value you offer. Practice your USP to build value for your clients and present your prices confidently.
Use technology to make it easier to make a profit on parts
Did you know? PartsTech simplifies how you manage profits on parts by automating markup calculations. With PartsTech, you can easily set up parts matrices and view your gross profit in real time as you add parts from your suppliers to your cart.
PartsTech also seamlessly integrates with leading shop management systems to help you ensure accurate pricing and healthy margins on parts before adding parts to a repair order in your management system — making profitability simpler than ever.
Created in partnership with The Institute for Automotive Business Excellence.