Tuesday, July 7, 2020

July 2020 - Parts Escalation Matrix: "Developing The Perfect Recipe"

In my opinion, one of the most debated and discussed topics in managing the Parts Department is the Parts Escalation Matrix, second only to managing Lost Sales. When it comes down to developing Pricing Strategies, which includes most often the utilization of a Parts Escalation Matrix, there are many variables that come into play.

Some of these variables may include market area, basic pricing strategies, piece sales & cost sales ranking, Dealer Management Systems, (D.M.S.) capabilities, parts training, etc. which all lead to variations from dealer to dealer when it comes down to what Parts Escalation Matrix to use, or when it should be applied.

Developing the "right" Parts Escalation Matrix goes well beyond "just having one", or "just using one" as there are many key ingredients in the development process that "should not" lead to the exact same matrix in any given dealership, unless, of course a parts manager does a "copy and paste" version from another dealer's matrix.

The reason that the Parts Escalation Matrix needs to be different is because of the variables previously mentioned, even if several dealerships are owned by the same company, these variables are still in play. One of the biggest variables fore mentioned is piece sales & cost sales ranking. Not all the same parts sell from dealer to dealer as markets and customers are different.

The utilization of a Parts Escalation Matrix is nothing new to any of us, but it is not a "one fits all" fix for achieving the proper parts gross profit numbers and percentages that we all expect. Much like any other process we have to manage, the Parts Escalation Matrix needs to be measured constantly for effectiveness.

Not only that, but the Parts Escalation Matrix needs to be designed to impact the proper price "cost ranges" with the right mark up percentages that will impact expected gross profit percentages without sacrificing or losing sales due to overpricing.

In this issue of ACG "Smart Parts", we are going to reveal our Top 10 Ingredients in "Developing The Perfect Recipe" when developing the Parts Escalation Matrix. Even though no matrix should be exactly alike, there are some basic guidelines, or "ingredients" that need to be applied to every Parts Escalation Matrix.

So!...before we get started with our Top 10 Ingredients in "Developing The Perfect Recipe" for our Parts Escalation Matrix, I have to ask all "Smart Parts" Managers this simple question....

"If so many Parts Managers have and utilize a Parts Escalation Matrix, then why are so many Parts Departments not achieving expected Customer Pay Gross Profit Margins & Percentages?"

The answer is...."Maybe we have the wrong ingredients in our recipe?"

Here's our Top 10....

As I mentioned earlier, there are Parts Escalation Matrix guidelines that, in my opinion, should be considered before we develop any parts matrix. The following Top 10 Ingredients to the perfect recipe will be listed in order of importance so that we can achieve our expected customer pay gross profit margins and percentages.

Number 1: Price Escalation Levels

I have seen so many Parts Escalation Matrices over the years and I have been amazed at the lack of, or improper cost ranges in many of them. Whether the matrix is a "cost plus" or a "list plus" matrix, there are so many "gaps" between these ranges. I have seen gaps from the $50.00 range all the way up to $250.00 with varying percentages above cost or list.

For example, I've seen cost ranges that from $5.00 to $50.00 with the same percentage increase which will result in under costing and over costing on certain parts with that much of a "gap" in the cost range. The end result is parts staff  "overriding" that matrix to a price closer the M.S.R.P., or perhaps even less, depending what they "think" the price should be.

Each Parts Escalation Matrix should have at least 12 - 15 pricing levels, whether cost plus, or list plus, (I prefer cost plus, which I will explain in our Number 3 Ingredient). Each level, escalating upwards, should only have a $1.00 gap up to $5.00, then a $5.00 gap from starting at $5.01 up to the $25.00 range.

The gaps can be increased by $10.00 or $15.00, starting at the $25.01 range up to $100.00 and then increasing by $50.00 or more before finally "capping out" around $250.00 with M.S.R.P. taking over from that point. As price increases, customers are more aware and may "price shop" at that point.

In my opinion, if a customer will pay $37.52 for a non-competitive part, they will also pay $39.87 for that same part as it remains in that "zone" where they are less susceptible to shop elsewhere. On the other hand, they may not buy a part that we may "matrix up" to $344.17, where M.S.R.P. is around $287.12

Setting up the appropriate levels is Number 1...percentages above cost or list may have to be modified from time to time to get the right "fit", but the ranges need to be consistent and a "constant". Not having the proper amount of ranges will only lead to more price "overrides" by the parts staff.

Number 2: Application - Where To Apply The Matrix

This is one question I get a lot...."Where should I apply the matrix?"...

There are some specific times that I may not choose to apply the matrix such as Competitive Parts as I mentioned earlier as those parts should be "flat priced" in the D.M.S., whether manually or automatically. Keep in mind that all parts should be priced the same "over the counter" and in the Service Department, whether matrix, or "flat priced".

Another area where "Application" comes into play is Pricing Policies & Strategies between certain customers and situations where promotions, discounts and certain parts like accessories may be involved. Training the parts staff is key to insuring consistency and proper gross margins and percentages are maintained.

Pricing strategies within the dealership could also affect whether we use the matrix or not is within our own internal organization like the Used Vehicle Department and Collision Centers. Once again, consistent and proper training by management is essential.

Lastly, we may have multiple Parts Escalation Matrices for Fleet Customers, Wholesale Accounts, Senior Citizens and Military, etc. that may require different matrices for certain situations as we are not limited to just one matrix, or "catch all" matrix within all parts sources, or parts stocking groups.

Number 3: Percentage Ranges

After we have set up a consistent and constant Pricing Range, it's now time to "experiment" with the proper matrix escalation percentages. Depending on which cost range, some parts may get "out of whack" and be way too far from M.S.R.P., and other parts may well be within the right percentage range.

Most important thing to remember here is that we have to separate by Parts Source, or Stocking Group which parts we want to matrix in the first place. In other words, I may have a set of brake pads that fall into the same price range as a sensor. The matrix price on the sensor may be okay, but I may be charging too much for the brake pads as they are more "competitive" and not "captive".

All competitive parts should be "flat priced" and excluded from the matrix by either Parts Source or Stocking Group and not updated to the matrix price. Most Dealer Management Systems, (D.M.S.) can be set up to override the matrix on "flat priced" parts.

The most important thing to remember about our Number 3 is that these percentages need to be experimented with, adjusted, modified, measured on a consistent basis and there are always a "moving target" and require on-going maintenance.

Number 4: Cost Plus Matrix vs. List Plus Matrix

Our Number 4 is also extremely important as I still see Parts Managers utilizing a "list plus" matrix and I believe that a "cost plus" matrix works best. For one thing, list price is also a moving target as list price varies on many parts and becomes very difficult to control retained gross profit.

Some M.S.R.P. prices may be set too low, especially with Accessories, and on the other hand, some M.S.R.P. prices have a "backed in" huge list price with lots of retained gross profit already. This may lead to either "under pricing" or "over pricing" on certain parts. Which, once again, leads to more price overriding by parts staff.

One thing to remember is that cost is always a "constant" and never changes as the price we pay is the price we pay. So, if I "mark up" from cost at 1.75% on a part that costs $10.00, I will always retain a 42.8% gross profit percentage, ($7.50), not matter what the list price may be.

The only way that we can control gross profit margins and percentages is to control our "cost plus" margins and percentages. It also allows us to make changes and modifications in specific percentage ranges in our matrix. In addition, it will always calculate, even if the manufacturer does not show a list price in their pricing guides.

Number 5: Captive Parts

I mentioned earlier that I don't believe that we should apply a matrix to Competitive Parts, which should be "flat priced", so that leaves us to those parts that are "captive" and less likely to be price shopped if the matrix is applied properly.

These "captive" parts also allow us to make up for the difference on competitive, "flat priced" parts to achieve our overall goal and targets on overall parts gross retention. Much like the Labor Grids we use in the Service Department, we need those "captive" repairs to make up for our competitive and maintenance service parts.

These parts can also be separated by utilizing the D.M.S. options with Source Stocking by Piece Sales, or other Algorithms that will determine which parts are considered "competitive" versus "captive". Once these ranges are determined, they can be separated by source, or stocking group with the proper pricing strategies applied.

The most important thing to remember when utilizing a parts matrix on "captive" parts is what cost ranges we need to focus on the most in order to retain our best margins and percentages, which leads us to our Number 6 Ingredient....

Number 6: Cost Ranges

Another key factor in developing the perfect recipe for the Parts Escalation Matrix is which cost ranges that need to be focused on. In most cases, 80% of our part sales at cost fall into the $10.00 to $35.00 cost range. These ranges can be easily determined by performing a D.M.S. Parts Ranking Report. This report can be run by parts sales at cost, and/or piece sales.

This report can also be usually run in an ascending, or descending option which will determine what parts are selling in what range by percentage. As mentioned, approximately 80% of most parts that sell at cost is between $10.00 and $35.00. The remaining 20% is split between the $.01 - $9.99 cost range and $35.01 and up cost ranges.

That being said, it's pretty obvious that when developing a Parts Escalation Matrix, we should be focused on the majority range on "captive parts". It also means that this is the range that requires the most work, modifying, experimenting, measuring and managing it constantly to insure proper gross profit margins & percentages.

A "tweak" here and there in this $10.00 to $35.00 cost range can make a huge difference in overall gross profit margins and percentages just from a volume standpoint. A simple 10% increase swing can mean a total difference of 1% - 2% in overall customer pay gross profit retention.

Number 7: Capping The Grid

Our Number 7 Ingredient is here for a reason as I've seen so many Parts Escalation Matrices that have little or no cap in the escalation percentages, thus resulting in lost sales and customer retention. In my opinion, any part that sells over the $250.00 cost range should default back to cost plus 67%, which will result in a 40% parts gross retention percentage on customer pay parts, which is industry standard.

In my opinion, many customers would be more inclined to price shop on repairs and/or parts that are higher in price, especially on high ticket parts such as engines, transmission, axles, air conditioning parts, or for any other major service repair part.

It's much better to gain a little most of the time instead of gaining a lot just a few times. Let alone what that would do to the dealer in general on future vehicle sales and overall customer retention. Capping the grid is also easier to remain consistent with less overrides as from the parts staff.

Number 8: Discounts & Overrides

The biggest "gross killer" when it comes down to maximizing the Parts Escalation Matrix is Discounts & Overrides. Not having controls in this category leads to inconsistent pricing from department to department, and dealer to dealer. Common sense should tell us that no matter who is selling the part, the price needs to make sense.

If the Parts Escalation Matrix does not have the right ingredients, the number one way we can tell is by the number of discounts & overrides were done by parts staff. Creating a "Parts Exception Report" in the D.M.S. by counter person weekly, if not daily is a must, especially if Discounts & Overrides occur frequently.

Once again, we have to look at these Discounts & Overrides in a common sense fashion and ask ourselves..."Why are they overriding the matrix?" If so, we need to look at our recipe from the beginning and check the ingredients. The "Perfect" Escalation Matrix won't have overrides and only  "authorized" discounts.

Lastly, on our Number 8 Ingredient, I've had MANY dealers call me and tell me that the matrix we installed isn't working. They suggest we have to adjust it higher, or, it's working on Counter Retail, but not on Service Customer Repair Orders which can't make sense, especially if it's the same matrix.

The last thing we should  to do is to play around and increase the Escalation Matrix due to poor retention when the real culprit is discounts & overrides, instead, we should be looking at adjusting, modifying or "tweaking" the matrix, training our people and holding them accountable.

We should also, (if possible) implement a "password protect" feature in our D.M.S. with password authorizations as to who can discount and/or override our pricing strategies in general and not just with the Parts Escalation Matrix.

Number 9: Measuring & Managing Results

Like anything else we do as managers, we have to measure and manage our results so we can "fix it" if need be. A Parts Escalation Matrix is not a "set it and forget" implementation and process. It requires constant monitoring and measuring just for the fact of promotions, seasonal changes, customer preferences, sales and gross numbers, etc.

Managing & measuring results may also lead to additional Escalation Matrices and where they be applied. Percentage modifications, marketing, sales and gross goals and a host of other reasons may lead us to having additional matrices. If we have and utilize a Parts Escalation Matrix, all the previous eight ingredients must be followed consistently and monitored constantly, no matter how many we have.

Lastly, the actions we take when measuring and managing the Parts Escalation Matrix requires staff accountability, training and coaching. Positive reinforcement is always recommended and encouraging feedback from our parts staff and will always help us achieve our goal of developing the perfect recipe.

Number 10: It's a Moving Target

Much like our sales and gross goals, the Parts Escalation Matrix is a constant, moving target as it should be. Sales and gross dollars always follow trends and the Parts Escalation Matrix is no exception. The Parts Escalation Matrix is also just a piece of the overall parts pricing strategies & policies that is different from dealer to dealer.

Developing any market strategy has to include how we sell and move products and/or services, so if we are not keeping our eyes on the never ending "moving target", we will never achieve our overall goals and expectations.

So, if we are not achieving our overall parts gross margins and retention percentages, then we don't have the perfect recipe in developing our Parts Escalation Matrix. If the results aren't there, it's time to get back to basics and change the recipe.

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...