Demarest: Maximizing Profit: Strategies to Reduce Parts Costs Without Sacrificing Margins

Over the last couple of years, inflation has been a hot topic, and most shop owners have been conscious about increasing their own prices to keep up with rising costs. Most of this focus is largely on the labor side of their business, since these are set pricing models and do not get updated unless the owner chooses to do so. Your technician costs, insurance costs, and general overhead costs have skyrocketed; of course, you cannot leave your labor rate unchanged for years. Parts sales are a bit simpler because as parts costs go up, sales go up just as much—or at least they should.

I am guilty of this oversight as well, but most shop owners are solely focused on the labor pricing side because we all assume that as prices go up, your markup will be the same and you end up making even more money. The truth is that most of the time this is exactly what happens, but I have also had several occasions where the exact opposite has happened, and shop owners were very surprised to find out.

How Rising Costs Affect Markup

In general, most shops are using a parts matrix to mark up their parts; as the parts prices get higher, the amount that they mark up decreases. This is a very important idea that we will come back to later, but it is often overlooked when thinking about rising parts costs. When we first saw major increases from shortages, we saw shops selling a $100 part for $200 and then jump to selling that same part for $400 a month later because the cost of the part had doubled. If you think about this over time, the shop owner added an extra $200 of gross profit for the same labor billed a month earlier. This is the ideal situation and, for the most part, exactly what has happened across the industry, lifting profits.

Overall, almost all my shops are making more money on parts, but what we have noticed in many cases is that the margins at which they sell the parts have been falling. What this would look like in a shop is that sales are increasing at 10-15% per year, but if you take a look at a five-year comparison, you see a decreasing parts gross profit percentage. Maybe in 2021 you were over a 50% margin on parts, and now you are well under; is that a product of the times, a different mix of parts, or something else going on in your shop?

If you were to sell me a brake rotor that costs $80, how much would you sell it for? Now think about a brake rotor that costs $320. You probably wouldn’t use the same formula to mark up these parts because one is quadruple the price and has a completely different markup than the cheaper part. The larger example here is that this is the same part—one of which you bought seven years ago and the other one you bought yesterday. Most parts have not seen anywhere close to that level of rise, but according to the government, most costs related to auto repair have risen 50% since 2020. This means that if your average part cost was $200 in 2020, even if you are selling the exact same items to the same customers, your average parts cost is now $300 in 2026.

Examine Your Parts Matrix

What this is causing is a logical shift down in most shops’ parts matrices to lower margins. It shouldn’t be shocking to most owners to think that as your costs get higher, you are selling them at lower margins, but if your parts matrix hasn’t been adjusted for pricing in 10 years, then is it really doing what you think? We are always thinking about the inflation side of labor costs and labor sales, but not translating these same increases into the parts matrix. Smart shops are staying ahead of this to not only increase sales but also increase margin; this is a prime example of working harder and smarter.

The other side of the equation, to increase your margins without increasing costs to your customers, is to get better pricing from your parts suppliers. However, if done incorrectly, you could be discounting your way into lower profits. One of my clients reached out to me recently about a promotion he secured with a local parts supplier to reduce his prices by 15%. He already had a strong parts margin and knew that the only way to improve this while staying competitive in the market was to leverage his buying power. Unfortunately, he secured the 15% savings and recorded his worst profit in years—but why?

What happened was that the shop owner’s net pricing was updated in his shop management software. This led to 15% lower costs, 20% lower parts sales, and the first monthly net operating loss in years. While an unusual example, smaller instances of this happen all the time—especially in a day and age where we blindly trust software to mark up correctly without auditing each ticket. A decrease like this was spotted relatively quickly because the outcome was so out of line with expectations, but how many other shop owners would not have noticed this for months or even years?

The truth is that for most shop owners, there aren’t many areas that can massively increase profits, especially if they are already doing the right things and analyzing their business. However, almost every shop has a couple of areas where they can find a few percentage points, which turn into big dollars by the end of the year. Parts are a great place and, for many, have been overlooked for years.