As an automotive repair shop owner, if you only focus on the big picture, you’re oversimplifying things. Different service areas should have different profit margin goals, helping you maximize your profitability.
So, you should be managing profit margins in a few different areas. Fortunately, we have some tools that can help. Let’s talk about what your profit margin goals should be!
At CSI Accounting & Payroll, we’ve provided monthly accounting services to auto repair shops for nearly 60 years. That means we’ve answered hundreds of questions like these:
- What profit margins should I set for different service areas?
- How can matrix pricing help me achieve my profit margin goals?
- How can I improve profitability without touching my pricing?
Profit Margins by Service Area
Most auto repair shops – even specialty shops – are going to have different service areas. Applying the same profit margin to all areas (just because it’s your desired overall gross profit margin) can lead to inaccurate pricing. Let’s talk about the two key service areas: diagnostics versus parts replacement.
Diagnostics
Diagnostics tend to be labor-heavy, typically having no parts replacement involved at all. If you have a lot of diagnostics services and charge your hourly rate for them, you may be losing money. The same can be said for jobs that take many hours due to extensive repairs or cars over 20 years old.
If your shop has many jobs like these, aiming for a 75 percent profit margin on labor is critical. That’s where labor markups from matrix pricing come in. I’ll get into matrix pricing later in this article!
Parts Replacement
You provide a service, but you’re also a retailer of replacement parts. As a retailer, you need to watch your margins more than just the volume you’re selling.
Parts replacement jobs have extremely varied part costs and labor involved. You won’t achieve the same margin on every part, but aim for an overall profit margin of 50 to 55 percent. Your margin may be 75 percent on an extremely inexpensive part but only 35 percent on an expensive part. (Again, that’s where matrix pricing comes in. You need matrix pricing so parts can be marked up on a sliding scale. I’ll tell you all about it in the next section.)
There’s also a standout part that can’t be included with the rest: tires. Why do tires have unique profit margin goals? They often have very slim margins due to competitive pricing, so they should have a profit margin of about 30 percent.
Matrix Pricing for Profit Margin Goals
I briefly mentioned matrix pricing in the section above when talking about profit margins for labor and parts (excluding tires).
Matrix pricing is a system that uses multipliers to adjust the selling price of parts and labor. If you aren’t using this strategy, you may be missing out on thousands of dollars in potential profit year after year.
Many management systems have built-in matrices, but they're often unused or programmed improperly. Luckily, matrix pricing templates – built by professionals who know your industry – can help you adjust your strategy.
Download our free parts and labor pricing matrix templates here!
Improve Profitability Beyond Pricing
Sure, there are ways to potentially improve your profitability without adjusting your pricing – but if you combine these operational strategies with adjusted pricing, you amplify the effects.
I recommend using matrix pricing to achieve the profit margins above, then optimizing profitability in the following ways:
- Step 1: First, take a look at your technician pay structure. Consider how it can influence your margins and the job satisfaction of your staff.
- Step 2: Next, measure the productivity and efficiency of your technicians. Use these statistics to find areas of improvement and motivate your staff to increase them.
- Step 3: Finally, know that satisfied, motivated staff is key to increasing your Average Repair Order (ARO). It’s time to make the most of service recommendations and upsell opportunities so you can increase sales in a way that keeps your customers happy, too.
Hit Profit Margin Goals With a Monthly Accountant!
Now that you know what profit margins to set for different service areas, plus how matrix pricing and operational strategies help, are you ready to check out monthly accounting services with experience in your industry?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
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