BIZ TIP: Going for Gross - A Discussion on Gross Profits and Price-Matrixing
The WIN welcomes Kelly Bennett, WTI Business Development Instructor and one of North America’s top Automotive Industry Trainers, as he settles into his new role as a WORLDPAC BIZ TIP contributor.
Kelly Bennett kicks-off his BIZ TIP series with Going for Gross, a discussion on gross profit and price-matrixing.
BIZ TIP: Going for Gross
by Kelly Bennett, WTI Business Development Trainer
First of all, I am thrilled to be contributing BIZ TIPS for the WORLDPAC Industry News - WIN! 2007 marks my twentieth year as a trainer (I have been told I do not look that old, thanks!) and over the years my passion for our industry has grown immensely. I have met some of the nicest people in this industry, and the support I received from the automotive industry after my horrible accident when I got hit by that taxi in Las Vegas in 2003 was absolutely incredible!
Many of these nice people are great 'mom and pop' businesses who work tirelessly to diagnose and repair vehicles and treat customers the old fashion way - with Great Service. What I have also learned first-hand is that many of these super nice people are not earning anywhere near what they should be for their hard work, time, stress, sacrifice and financial commitments they have invested in their business.
When I work with a hard-working client who is earning very little (one such client had a sign that read "This Non-Profit Organization Was Not Intended To Be So") one of the first questions I ask is “What is your gross profit on parts?” I have seen so much money earned but not collected just because the parts portions of their jobs were being undersold.
Two main reasons for underselling parts are:
1) Not Understanding the Difference Between Mark-Up and Gross Profit
2) Plain Old Fear
Both of these reasons deserve plenty of attention. Because of this, Going for Gross just focuses on understanding the difference between mark-up and gross profit (and 'plain old fear' will be addressed in another BIZ TIP).
Understanding the Difference Between Mark-Up and Gross Profit
During my years of training I have frequently asked shop-owners what their overall gross profits on parts are. Many answer, “I mark them up 50%.” But what more shops should be aware of is that mark-up is very different than overall gross profit. To emphasize the difference between mark-up and gross profit I ask shop owners, managers, service advisers (and even some part sales people and accountants) that if they bought a part for $70.00 and wanted to sell it for 50% gross profit, what price should they sell it at? I request that everyone write their answer down and then we discuss.
Now, I can understand when I receive answers of $105.00, as this is the right amount for a 50% mark-up (70 plus 50% of that 70 is 35, so the total sale is $105.00). I can also understand an answer of $140.00, as this is the correct answer (explained in more detail below). But what baffles me is when I receive many other answers. In fact, last week I ran a session with 38 people in attendance and we had 15 different answers to this same question!
The issue here is not intelligence, it is ignorance. There is a huge difference between the two states of mind. I know a lot of super sharp shop owners who are brilliant at diagnosing and repairing cars, but who have simply never been shown the difference between gross profit and mark-up, or sometimes even how to properly sell parts. If you are asking yourself, “What is the difference between mark-up and gross profit?” I will tell you . . . a lot of money!
I have literally seen shops rescue themselves from going out-of-business with this tip alone. It reminds me of another sign I once saw in a training room many years ago; “If you think that training is time consuming and expensive, try ignorance.” Ignorance (not stupidity) has been a very expensive trainer for too many of us. Confusion and ignorance cost us all a lot of money.
Again, adding 50% to the cost of a product and selling it at that price is 50% mark-up, not 50% gross profit. Gross profit is the dollars we have left after we’ve paid for what we’ve sold. 50% gross profit is actually you keeping 50% of what you sold the part for. In other words, gross profit is what you want, markup is just the calculation. So, if you want 50% gross profit, you have to mark it up by 100%. Another way of saying it is that markup is a verb (what I need to do) and gross profit is a noun (what I need to get).
Price-Matrixing
Price-matrixing allows you to get a higher gross profit percentage on the lower-cost stuff and a lower gross profit percentage on higher-cost items. This is how the business world typically works. For example when I buy a cup of coffee it is only a couple of dollars, but that business is getting a really high gross profit percentage (maybe 90%). However, when I buy a new car, even though it costs a lot more the percentage the dealership gets is probably a single digit.
Ideally, you should be getting a 50% overall gross profit on parts – less on the higher-priced parts and more on the lower-cost items, but it should average out to 45-50% overall. I know that at first this may seem confusing, but it really is simple once you get the hang of it. Many shops use the “path of least resistance” by just using the supplier list price which is often too small of a gross profit to pay a shop’s unique mix of bills and expenses.To assist you while you are getting used to price-matrixing I have created a simple Excel spreadsheet which I can email you by request (send requests to: kellythecoach@aol.com). It’s easy and you can use it every day! Notice that the gross profit you get on a part depends on how much you originally paid for it (see chart).
For example, if you buy a part for $99.95 you should be selling it for $181.73 (45% gross profit). If the part costs $20 you should be getting $57.14 (65% gross profit). And if it costs $4.95 you should get $19.80 (75% gross profit). The nice thing about the spreadsheet is that you simply enter how much you paid for a part and it instantly shows the recommended selling price.
Another hurdle for most of us is how much we allow our emotions to control how we run our businesses. Are you in the auto repair business to make money, or just to see how many people you can please?
In future BIZ TIPs I will continue discussing why we should (almost) never charge only list and the huge benefits of extending your warranty. Until then, happy price-matrixing! And if you have any questions, please feel free to contact me directly.
Kelly Bennett
Business Development Trainer
kellythecoach@aol.com
Visit the WORLDPAC Training Institute (WTI) to learn more about Kelly Bennett's Business Development Classes.
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