As vehicle gross profit per unit faces downward pressure, successful dealers are shifting their attention to fixed operations—specifically the parts and service departments. Why? Because the service drive offers a significant opportunity, one that’s essential for sustaining profitability as the age of vehicles continues to grow, extending the period for which vehicle owners seek highly trained technical service rather than opting for new vehicles.
A Strong Parts Strategy Matters More Than Ever
The parts department is typically static with few changes. However, a couple of industry shifts are reshaping the landscape for parts sales:
- Original Equipment Manufacturers (“OEMs”) are Adjusting List Pricing: Warranty Reimbursement laws have prompted OEMs to adjust their list pricing downward, often making it less reliable as a standard for setting your dealership’s prices. If your dealership has a matrix based on list pricing, the OEM ultimately controls your parts matrix.
- Inflation is Moving the Sweet Spot: The most impactful range of parts is referred to as the “sweet spot.” The sweet spot is based on the volume and dollar value of the parts. COVID-19 and the subsequent inflation have moved this “sweet spot” from $50 to $200 to $200 to $500 on average but will vary by OEMs. Many dealers still employ parts matrices that phase out at $200 in cost.
Both factors could be limiting your dealership’s overall profitability. It is critical for management to review its parts matrix to identify whether either of these pitfalls exist. This can be overwhelming for dealers and general managers, especially those who grow up in the industry from the new and used vehicle sales side. We have created a tool called the Parts Matrix Analyzer that performs this task for the dealership. It also provides a recommended parts matrix that will maximize profitability. It is important to note that parts managers will want to source maintenance and competitively priced parts in a source that does not apply the matrix in order to stay competitive for those services. This also should not be applied to counter or wholesale parts sales.
A Captive Audience
The customers in your service drive are a captive audience trusting your service department will fix their vehicles to OEM standards while providing excellent service. Oftentimes, customers are more concerned about fixing the vehicles in a timely manner than the cost. We hear little to no pushback from those dealers that have utilized our Parts Matrix Analyzer, demonstrating that the market will bear the price increase.
Action Items for a Strategic Parts Matrix
To maintain profitability, your parts pricing strategy needs regular attention. Here’s what you can do:
- Base Matrix Pricing on Cost, Not List: List prices from OEMs are ever-changing and at the discretion of the OEMs. Instead, use the actual cost of parts as the foundation for your matrix. This ensures that the dealership controls its matrix and maintains profitability while staying competitive.
- “Set It and Forget It” Pricing No Longer Exists: Your parts matrix should never be static. Conduct an annual review to adjust for market dynamics, pricing trends, and competitive factors. This keeps your dealership responsive to changing conditions.
- Don’t Let the Vocal Minority Dictate Strategy: It’s easy to let the rare vocal customer complaining about price sway your decisions. But remember, these exceptions don’t represent the majority. Stay focused on the data and trends that reflect broader customer behavior—not the outliers.
The Bottom Line
A well-maintained, data-driven parts matrix is essential for keeping your dealership profitable amid declining vehicle gross profit and evolving market forces. By reviewing your strategy annually, pricing intelligently, and tuning out the noise of outliers, you can capture more revenue and solidify profitability in fixed operations.
Authors: Frank O’Brien, Partner | [email protected] and Patrick Schroll, CPA, CFE | [email protected]
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For more information on this topic, please contact a member of Withum’s Dealership Services Team.
