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The Great Pricing Debate


2/1/2004
By Gary Goms

Mark up, gross profit, turns, coverage, warranties, delivery, margins and availability are all items that weigh heavily in the Great Pricing Debate.
 

It's been said that wholesale accounts only care about three things: price, price and price.

Of course, there are other issues that are often just as important as price. The real question, then, is this: Will other essential services like warranty, availability and returnability offset a traditional jobber's higher prices?

The answer is yes and no. The likely answer is 'Yes,' in the case of critical replacement parts and 'No,' in the case of commodity items like oil and filters.

Nevertheless, today's Great Pricing Debate usually means that many traditional jobbers are losing valuable sales to retail competitors that seemingly can offer low-ball prices on commodity items ranging from engine oil to reman steering racks. Most full-service jobbers find themselves hard-pressed to operate at current pricing levels, much less meet competitive prices on a dollar-for-dollar basis in order to meet dealer account expectations. Are low prices truly the indicator of superior value to the traditional dealer account? Not always, especially if we analyze what wholesale price means to the average repair shop.

PRICING LANGUAGE
Let's begin by getting our terminology straight. Many dealers, for example, use the terms "mark up" and "profit margin" interchangeably to compare the profitability of competing parts lines.

Unfortunately, the dollar difference between selling a part at 50 percent mark up versus selling it at a 50 percent margin is as wide as the Grand Canyon.

To illustrate, let's say I buy an item for $1.00 and then add a mark up of 50 percent so that we can sell it for $1.50. Of course, if we analyze the selling price, we discover that that our gross profit of 50 cents is only one-third or 33.3 percent of the total retail price.

Now, let's mark up the part by 100 percent so that the $1.00 part is now retailing $2.00. We now have a 50 percent profit margin. So, which part yields the most profit? Do we choose the one with 50 percent markup, or the one with 50 percent margin? I'll let you do the math.

GROSS PROFIT
Another issue in the Great Pricing Debate is the gross profit yield of an individual part. Let's say I buy a second-line air filter for two dollars and mark it up 100 percent. This means that we're selling the filter at four dollars, which yields a gross profit of two dollars.

Now, let's buy the first-line air filter for three dollars, mark it up 100 percent and sell it for six dollars. The gross profit is three dollars or 50 percent more than the second-line air filter. If a shop sells 1,000 air filters each year, this means that selling the first-line air filter adds an additional $1,000 to the shop's bottom line.

PRICE AND VALUE
Now that we've threaded our way through the math, let's look at value-added services. What if a competing store offered Brand "A" shock absorbers for 30 percent less than your jobber store? If you sell the "A" shock for $40, that means your competitor is selling it for $28. Twelve bucks is a lot of difference, right? Before we answer that question, let's factor in variables such as availability, returnability, warranty and wait time.

Let's begin by saying that, when a shop has a vehicle on the lift waiting for shock absorbers, productivity is taking a nosedive. Worse still, if the shocks aren't replaced at the appointed hour and during the allotted time, that means the service writer must inconvenience the customer and frustrate the technician by re-scheduling the vehicle in another time slot.

Now, let's say that the store selling at 30 percent less is doing it by stocking only 20 of the most popular of a possible 100 Brand A part numbers. Applying straight mathematics, the store will cover a shock order on only one out of five calls for that particular part number. If the store stocks only one of each part number and that number happens to be out of stock, the vehicle may remain on the lift for 24 hours until the part is actually re-stocked and delivered.

What happens when a traditional jobber stocks all 100 numbers of the Brand "A" shock and stocks to a depth of three units for the top 20 movers? First of all, the dealer will find that, regardless of the application, the traditional jobber will have the job covered on the Brand A shock absorber line. Second, if the inventory depth is three for the top 20 numbers and two for the next 30 numbers, the chances of the shock absorber being out of stock is very low.

TIME EQUALS MONEY
Don't forget that time equals money in the automotive service business. To better illustrate, let's change our example from shock absorbers to brake pads so that we can see exactly how much a $12 "savings" affects the total price for a typical front-wheel single brake job.

A typical front brake service package might include cleaning and lubricating the caliper guides, turning the brake rotors, flushing the brake hydraulic system and torquing the lug nuts to specification. An average labor charge might be $140. If the shop bought the Brand A pads for $40 and marked them up 50 percent, it would charge $60 for the brake pads, which would retail the front brake service at $200 for parts and labor.

If, on the other hand, the shop bought the same Brand A brake pad for $28 and marked it up 50 percent, the pads would retail at $42, which would create a retail price for the front brake service of $182 for parts and labor. Notice that the shop buying the Brand A pad for $28 and marking it up 50 percent is making only $14 instead of $20 in profit.

Not that any shop is going to make more money by spending more on parts. But the true value of any automotive replacement part is most often represented by the services that accompany it. A $12 savings rapidly vanishes, for example, if the store selling it isn't prepared offer a tech hotline service that will help correct a brake squeal problem or offer a satisfaction-guaranteed performance warranty on the brake pads. Nor do the savings represent a real value if the store is hesitant to restock the brake pads when the customer postpones doing the brake job in the first place. And, considering that most shops bill time at least a dollar per minute or $60 per hour, if the wait time exceeds 12 minutes, the initial $12 savings disappears even before the pads are installed.

COMMODITY ITEMS
Multiple-application or commodity items like lubricants, chemicals and hardware items present a more difficult challenge from the discount market.

Margins and gross profits on motor oil and oil filters, for example, may be so low for many jobbers that it's difficult to justify stocking and handling costs. When selling to the wholesale market, the best way to improve profits on commodity items may be to generate enough quantity to be profitable by selling in case lots. After all, the paperwork is the same for five quarts of oil as for five cases. And selling the top five popular numbers of oil filters in case lots might help remedy the problems caused by thin margins.

Spark plugs, of course, typify another profitability issue for jobbers. Currently, most jobbers may stock complete lines in at least a half-dozen brand names of spark plugs. Of course, many price competitors provide 100 percent coverage on only one brand of spark plug and a 50 percent coverage on perhaps one or two brands of spark plugs, so the competitive threat to professional accounts is somewhat diminished by incomplete stock and lack of immediate availability.

On the other hand, if we look at extended service interval spark plug replacements, we're seeing an increasing demand for quality spark plug wire sets. This trend is driven by the fact that high-mileage spark plug wires are usually ruined upon removal and the fact that many auto manufacturers are recommending spark plug wire changes as routine maintenance. So, providing the wire inventory has adequate breadth and depth, coupling a wire sale with a set of spark plugs can be a great marketing strategy for jobber and dealer alike.

 













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