Monday, November 4, 2013

Dave's Top 10 Indicators: "Customer Pay Gross Percentage to Sales"

Our ninth "Top 10 Indicator" focuses on parts customer pay gross as a percentage to sales. Our pricing policies have a definite impact on what we retain on the "bottom line".

In many cases, these pricing policies, particularly on customer pay parts, can often be the determining factor in overall Parts Department profitability.

Most industry guidelines for customer pay parts gross profit ranges anywhere between 40% - 45%, depending on the manufacturer.

Sadly enough, I see many Parts Managers failing to achieve these benchmarks more often than not. Even worse, it's one of the easiest benchmark to achieve and maintain.

Achieving these benchmark levels requires a combination of pricing policies that will allow the Parts Department to be competitive in all areas.

As many of us already know, utilizing a parts pricing escalation matrix is the key to achieving the proper gross retention percentage.

Many Parts Managers may already utilize a pricing matrix, but still don't achieve the proper customer pay gross retention because they are not utilizing it properly.

They may not realize that there are some price ranges that need to be more aggressive than others, especially on "captive" parts sales.

First of all, we absolutely should not be using an escalation matrix on competitive parts or "fast moving" parts. Actually, we should be lowering our gross expectations on these parts to remain competitive and to retain our customer base.

Our best opportunities for maximizing a parts escalation matrix comes from sales on "captive parts". Another fact is that 80% of our parts sales come from the $10.00 - $25.00 parts cost range.

Increasing the matrix percentage in this cost range on "captive parts" can dramatically impact the overall customer pay parts gross percentage.

Customer perception also plays a key role in proper use of a parts escalation matrix. Customers usually have a general idea of what competitive parts sell for, but not so much on "captive" parts.

Here's an example...

Let's say that you are bringing your car in for service with two primary concerns. The first is your "Check Engine Light Is On" and the second is "Interior Lights Are Inoperative".

After diagnosing the first concern, the cause on the "Check Engine Light" is a P0301 code stored for a misfire in the number one cylinder due to a cracked spark plug.

The diagnosis on the second concern revealed that the drivers side door jam switch was sticking, thus causing the failure on the interior lights.

Parts needed for repairs are a spark plug, (non-platinum) and the drivers door jam switch. The customer retail price for both the spark plug and the door jam switch is $12.50. The question is, which item do you think the customer is going to think is too expensive?

Perception is everything in this case as most customers would perceive that the spark plug is too expensive and the door jam is perceived to be priced fairly. The irony here is that the spark plug actually costs more than the door jam switch!

The matrix price on the more "captive" part, (door jam switch) allows us to retain more gross profit so we can sell the spark plug at a more competitive price. This balance in pricing can insure an overall customer pay gross profit percentage to the desired level and beyond.

So, how do we determine which parts are captive, competitive or fast moving in order set up the proper matrix?

Setting up our parts sources and ranking them by piece sales allows us to separate these three categories as well as setting up individual escalations for each individual source.

For example, parts with sales in excess of 100 times per year are apt to be more competitive and/or fast moving. These parts should not be attached to a matrix in order to remain competitive.

Parts with sales with perhaps 5 - 14 sales per year are more likely to be "captive" which allows the Parts Manager to be more aggressive with the matrix in that source. Once again, perception is the key on these sales on "captive" parts.

In my opinion, if a customer says "yes" to a sway bar link that sells for $22.87 at factory list price, they would also say "yes" to $26.22 for that same part. Especially if the Service Department is using "One Price" estimates properly.

In my opinion, maintaining the proper customer pay gross retention percentage has always been one of the easiest goals to attain. I can't think of any other department in the dealership where you can manage the gross retention by using a key board and a computer.

Lastly, there's a right way and a wrong way to having an effective pricing policy. Don't be one of those Parts Managers that tries a get "all the money" on those fast moving, competitive items because they are guaranteed sales.

There are a lot of missed opportunities on getting a little more for stocking the right "captive" parts, the first time!

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTMThe only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at Vist our Website at