Setting prices is an essential step for any new business. But in the automotive industry specifically, pricing can often be tricky. Manufacturers and large businesses often set prices or recommendations that small businesses can’t or shouldn’t compete with. So in order to price parts that will allow a small business to run sustainably, it can help to get an expert’s point of view.
Frank Leutz is the owner of Desert Car Care in Chandler, Arizona and host of the top ranking car talk radio podcast Wrench Nation. Through the years of running his award winning business and interacting with other shop owners, he’s come up with a pricing strategy that has allowed his business to be successful and reach its profit goals. Here are some tips to help you do the same.
Automotive Parts Pricing Tips
Consider Your Profit Goals
Before you actually come up with prices, it can help to work backwards. Calculate your expenses and consider the amount of profits you ultimately want to bring in. From there, you can determine roughly what range your profit margins should be in so that you can support all of your operations and still grow your business.
Don’t Just Use Manufacturer Prices
One mistake that Leutz sees quite often is auto shops simply going with the manufacturer recommended prices, rather than considering their own costs, customers and goals. He says that shop owners shouldn’t just assume that customers won’t pay higher prices and attempt to compete with dealerships and other auto businesses on price alone.
Create a Pricing Matrix
Instead of going with those recommendations, Leutz’s business has a pricing matrix that the team uses for every part. The matrix builds in a profit margin of between 54 and 52 percent for each item. The items that are over $500 have the lowest profit margin, while the least expensive products have a slightly higher margin.
Make it Simple for Your Team
While it might seem tempting to have different pricing models for each type of product, Leutz says that discipline with pricing is very important. In addition to it allowing you to stick with your profit goals, it can also make everything easy for your team if they’re in a situation where they have to set prices.
Leutz adds, “Our matrix is set up to be ‘set it and forget it’ so we don’t really stray from that.”
Create a Sustainable Strategy
When considering the profit margins for each part, you need to also factor in potential growth. Are you going to need to hire extra team members? Are your marketing costs going up? Consider future costs along with your goals when determining how much profit margin you need to include in your pricing strategy.
Value Quality Help
Another thing to consider over the long run, according to Leutz, is hiring quality talent for your business. If you can bring on employees who are experts in the automotive industry and great at serving customers, it can help your customers receive value for their investment and support your operations for years to come.
Rather than trying to lower your prices to appeal to customers, Leutz recommends setting your prices in a way that will allow your business to run successfully and earn a profit. Then you have to find ways to add value that really appeals to customers.
He says, “The most important thing you can do is communicate the value you offer. That could be including a warranty, long-distance warranty, tow truck service, brokering rental cars, whatever it is.”
Focus on Convenience
One of the best things you can do to get customers to understand the value that you offer when installing parts or providing other products or services is by calling attention to the convenience you offer. For an automotive business specifically, there’s convenience in installing parts so that customers don’t have to purchase the item from a manufacturer and then install it themselves. But you can also offer some additional options or aspects that improve the experience and make it even easier for them.
Leutz says, “Time and time again in studies, consumers have said that they want convenience and they’re willing to pay for it.”
Additionally, consumers tend to appreciate when businesses will take responsibility for the work they do. If you are accountable through some sort of warranty or satisfaction guarantee, your customers can feel more comfortable that the part and service are going to hold up and that you’ll take care of it if anything goes wrong.
Luetz says, “Like any other service, there is an accountability factor that gives consumers peace of mind. So part of the markup margin is there to pay for all of that profit that the garage is entitled to.”
Train Your Team
On the service end, you also need to make sure that your team members are equipped and prepared to communicate that value to customers who come in. If a customer knows they can get a part for a cheaper price somewhere else, then every member of your team should be prepared enough to explain why they should still do business with your company instead.