Wednesday, October 7, 2015

October 2015: Controlling Parts Pricing & Discounting

In my opinion, there is a big difference between "managing" and "controlling" the average dealership Parts Department. Managing Parts Gross Profit, Expenses and Net profit, as we discussed in the last three part series is actually the "net result" from having the Proper Controls.

As we "kick off" the first of this three part series with "Controlling Parts Pricing & Discounts", I want to start out by asking "Smart Parts" Readers this question....

"Can you name one other dealership department other than the Parts Department, that allows other dealership departments to have control of pricing & discounting?" 

Pretty interesting when you think about it as other departments such as Service, Sales and even Collision Departments play a big role in parts final pricing. Not to mention, who has the power to give discounts in the D.M.S., (Dealer Management System).

Even though the Parts Department bills the part out and controls the "initial" price of each part, the final pricing is controlled by Service, Sales and the Collision Centers. I don't ever remember the Parts Department ever having that control over New & Used Vehicle Sales or even how much labor should be charged on each customer pay repair order.

If the parts price is "perceived" to be too high, or if mistakes are made in estimating job price, it's usually the parts that get discounted most often. I know that this may offend some Service Managers out there, but I don't think many of them can say that it hasn't happened before.

I do understand that parts need to be priced competitively on service menus items as well as "add on" accessory items in the sales department. I also know that most Parts Managers participate in the initial pricing with other department managers on these items, but once again...who's ultimately in control?

Even though the Parts Department needs to remain competitive on these items, safeguards should be in place. One feature is to use password protect features on the D.M.S. to maintain pricing controls and prevent unauthorized discounting.

In many dealerships, service and parts discounts are charged back to gross profit accounts as opposed to being charged to an expense account such as advertising. Even though this is a very common accounting practice, it is much harder to maintain accountability as these discounts just get lost in the "sea of gross profit".

Many Parts Managers don't even realize how much of their gross profit is lost to discounting until the month is over when it's far too late to recoup the lost revenue. Once again, discounts given on parts by other departments "with control" of our parts sales and gross profit.

So, how do we regain control of our gross profit lost due to others controlling our parts pricing and discounts?

First of all, we have to realize a couple of basic facts.....

Other than "over the counter" parts sales, parts invoicing is heavily controlled by repair orders in the service and collision departments. Other than having some control by utilizing password protect features on the D.M.S., the Parts Department does not have much control. 

With that said, the "Smart Parts" Manager has to regain control by managing the tools "within our control" to offset these basic facts. We have to have pricing policies that insure overall profit retention with the proper offsets in our escalation matrix that will balance with discounts.

Parts gross profit retention must be controlled daily in order to maintain proper gross profit percentage levels. The parts escalation matrix should be utilized on "captive parts" in the right cost of sales ranges on a consistent basis. 

A reduction of parts gross retention of 5 - 10% due to competitive pricing and discounts can easily be regained by modifying the parts escalation matrix. Modifying the non-competitive, captive parts in the $10.00 - $25.00 parts cost range by 20% can easily overcome this gross retention loss. This cost range is where 80% of our parts sales come from.

Another big key to controlling the gross profit retention is to know what the lost gross amounts due to pricing policies and "qualified" discounts are on a daily basis. This information is readily available on most Dealer Management Systems on a daily basis, whether the amounts are charged back to gross, or an expense account.   

In order to regain control of our parts pricing and discounting structures, we have to know how to play the game and do it on a daily basis. It's not uncommon or unusual to make these parts escalation matrix modifications far more often than most Parts Managers do.

Even though the facts are what they are, there is no reason to lose parts gross profit. Just because other departments may have the initial control of parts pricing policies and discounting, there is no reason to lose ultimate control of achieving proper gross profit retention. 

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