Set Goals for Your Gross Profit Margin (GPM)
Setting and hitting appropriate GPMs is crucial for your automotive repair shop to maintain success. At a minimum, set goals to achieve a 50% profit margin on sales of parts and accessories. Parts and accessories purchased from dealerships are normally priced somewhere lower on the spectrum, while parts and accessories purchased from jobbers are normally priced higher on the spectrum. An overall pooled margin of 50% is a realistic and attainable goal.
Every job is different. However, over a long period of time, strive to average about $1 for labor for every $1 of parts sold. If your labor sales are significantly higher than your parts sales over time, it usually means that you aren’t marking your parts up enough. If your parts sales are significantly higher than your labor sales over time, it usually means that your shop labor rate is too low.
Under the model described in this blog, you will average 70 percent combined gross profit on labor and parts sales.
Boost Your Profit Margins
To reach higher gross profit margins, owners and operators try some or all of the following best practices:
- Set diagnostic rates equal to labor rates
- Implement matrix pricing for parts
- Factor drive time before and after repair work into the work order
- Charge for shop supplies and environmental fees
- Negotiate with vendors on parts and supplies
- Track inventory to reduce parts theft
- Evaluate labor rate increases on a periodic basis
- Find opportunities to raise average repair orders
- Focus on customer service to retain quality customers
- Track productivity of technicians and service writers
- Pay employees using a commission-based system
- Invest in top talent and training
- Develop plans for growth
- Outsource accounting activities
These best practices require owners to stay out from under the hood to monitor the health of their business. If you structure your gross profit margin goals accordingly and track your sales and cost activity, your focus can shift to maximizing volume based on potential per service bay.