Got Margin? Why You Shouldn’t Always Depend on Markup

Hell o markup my old friend
I’ve come to write about you again—
PSYCH!

No, friends, we’re not here to share stories of parts markup. Been there, done that, built a free tool around it.

Lately, though, we’ve gotten a few pings about using margin as a go-to way of understanding your shop’s performance—particularly in parts sales. The economy, the parts shortage, crazy fuel prices, and inflation have all combined to create a whole new environment for shops to operate in. What worked in what this writer will call the Before Times doesn’t necessarily have the same effectiveness anymore. So, in the interests of helping diesel repair shops run more efficiently, we are taking a closer look at margins.

Fullbay customers—and overall cool people—Luke Todd of The Service Company and Irvin Bowman of Truck Shop Network were invited to chat with us about all things markup and margin, patiently answer our zillion questions, and overall share with us why shops are better off trusting margin to make sure they’re making what they should on parts—no matter how often prices go up and down.

THE MARKUP AND THE MARGIN

Before we get into the nitty-gritty, let’s explain what we mean by markup and margin.

Markup is the percentage over purchase price that you charge a customer for a part. Conceptually, this is probably easier to grasp than margin—you’re just attaching a set percentage to everything you sell. If you buy a part for $100 and have a 25% markup, then you will sell that $100 part for $125.

We asked respondents in our State of Heavy-Duty Repair (SOHDR) how much they typically marked up their parts. The West threw out the big numbers, averaging 39% markup. The Southeast and Southwest followed, with 38% and 37%, respectively. So, a shop in California might buy that $100 part and sell it for $139.

Margin refers to what you actually make. It is usually the difference between your expenses and your revenue. If you buy a part from a vendor for $100, and sell it for $125, then yay, you made $25 off it. That’s a 20% profit margin.

Here’s a formula:

(Revenue – Cost) / Revenue = Margin Percentage

($125 – $100) / $125 = 0.2 or 20%

If you want even more numbers, think of it this way: If you have a 50% margin, you are keeping 50% of what you are selling the part for.

By the way, the SOHDR found that once again the West leads the way in this department, averaging 28% margins. The Southeast is right behind it with 27% average margins, and Canada brings up the rear with 23%.

You can learn even more about margins, markup, and calculating each in this excellent blog.

THE CASE FOR USING MARGINS

Irvin describes using only markup as a “vanity metric.” It might make you feel good to look at it, but it’s not guaranteed to keep your shop out of the red, especially these days. Markup can also lead to revenue problems when you start applying discounts for certain customers.

Check this out:

If you get a $1 part and mark it up 25%, then you’re selling it for $1.25. That’s a 20% margin.

($1.25 – $1)/$1.25 = 0.2, or 20%

Let’s say you sell that part to a customer for a 20% discount. You may think you are still getting a 5% markup, but that discount actually wipes out your margin and profit. In mathematical terms, here is what happens:

$1.25 * 20% discount = $0.25 discount

In the end, the actual sales price is $1.

If you discounted the part, even more, you actually might lose money on it.

Now multiply that by every part in your shop. Or even half the parts in your shop.

Yikes.

Don’t do that.

You need to make money and cover your overhead if you want to keep your shop running. Many shops aren’t making a ton of money off labor, so a healthy profit on parts is often critical to staying afloat.

Irvin has found that in many cases, a shop’s overhead cost vs. what they charge for a labor rate are entirely too close for comfort. If they don’t have a decent parts margin—if they’re not making money off their parts—then they’re out of business.

Irvin suggests using a parts matrix to make sure you are getting the best margin on different parts (psst, we had a whole webinar devoted to it). Low-priced parts can have a bigger margin, while higher-priced parts will have a smaller margin. You can extend this to vendors, too; make sure you have different margins set for the vendor, customer, and so on to maximize the profitability of your shop.

As an aside, margin works better with general accounting practices and helps with profit and loss statements. “You should be speaking the same language from start to finish,” Irvin says.

MAXIMIZING YOUR PARTS MARGIN

“If you want to maximize your margin, you need to buy right,” says Luke.

We’re kind of operating in the Wild West of repair right now. Usually, when you put a part on your shelf, it depreciates about 20% each year. In the post-pandemic wilderness, though, your parts might be gaining in value. Let’s say you buy something for $10 in January and put it on your shelf. If you’re keeping a 33% margin on things, you’ll sell for $15. Restocking that part will cost $16.

And so it goes. Vendor prices keep inching (or jumping) up and if you don’t make adjustments, you’ll end up losing money. We’ve heard some parts managers have tried to combat this by stocking up as often as they can. They have been seen crouched atop a pile of parts in the darkness of the parts room, clutching shock absorbers, whispering, “My precious…”

In all seriousness, parts hoarding isn’t a great long-term solution. But that’s another blog.

One of the keys to maintaining proper margins is knowing what your vendors are charging for a part. Most will send you price updates when changes occur, which you can then plug into your accounting system or shop management software so you can apply whatever markup and margin you need to.

Convenient, right? Vendors still do that. A lot. As in way more than they used to.

Luke remembers the good old days, when he might get price updates from vendors once or twice a year. “Now we’re sometimes seeing changes once a month,” he remarks. One of his biggest pieces of advice for shop owners is to load price updates into their systems as soon as they’re released. If you don’t, and sell something under the prior price, then you end up eating the difference—which might be sizable.

That’s nice, Fullbay, you may be saying, but does your app handle margin?

WHY YES. YES IT DOES.

Fullbay can absolutely help you set margins, even when prices are constantly going up or down. set margins and markup in areas like parts, vendors, and even customers. When it comes to parts, though, just remember to plug in updates as soon as your parts vendors release them.

Whew! That was a lot. Do you use markup or margin when measuring performance? Want to let Fullbay do some of the math for you? Click here to schedule a free demo—and see how well your shop can run when powered by Fullbay!