Most workshops know exactly what they pay for a part.
Far fewer know how much profit they actually make when they sell it.
You buy a part for $100, double it, charge the customer $200 and move on to the next job.
Easy.
You made 100% profit, right?
Not quite.
You applied a 100% markup, but your gross margin is 50%.
That difference between markup and margin might sound like accountant talk, but it matters. If you are selling thousands of dollars of parts every week, getting it wrong can leave a significant amount of money on the table over the course of a year.
And simply doubling every part isn’t necessarily the best pricing strategy either.
A $10 seal and a $1,000 component create completely different pricing problems for a workshop.
So how should a small mechanic workshop think about parts pricing?
Markup and margin are not the same thing
Let’s get the terminology sorted first.
Markup is how much you add to your cost.
If a part costs you $100 and you sell it for $200:
- Cost: $100
- Selling price: $200
- Gross profit: $100
- Markup: 100%
- Gross margin: 50%
Margin looks at your profit as a percentage of the final selling price.
This distinction becomes important when you’re setting profit targets.
If you double the cost of a part, you are applying a 100% markup, but your gross margin is 50%.
A workshop owner who thinks markup and margin are interchangeable can believe their parts sales are performing much better than they really are.
Parts profit is paying for more than the part
Customers sometimes look at a part online, see it advertised for a certain price and wonder why the workshop is charging more.
But a workshop isn’t just handing a cardboard box across a counter.
Someone has to identify the correct part, find a supplier, order it, check it when it arrives, allocate it to the job, return it if it’s wrong and deal with the problem if it fails.
There can also be freight charges, time spent dealing with suppliers, warranty claims, incorrect parts, credits, stock sitting on shelves and parts that are ordered but never used.
All of that costs the workshop money.
If you buy something for $80 and sell it for $90, you haven’t necessarily made an easy $10.
By the time someone has spent 15 minutes finding and ordering it, you’ve received it, processed the paperwork and carried the risk associated with supplying it, there may be very little actual profit left.
Parts margin helps pay for the service surrounding the part, not just the component itself.
Doubling the price of every part can cause problems
A common approach in smaller workshops is simple:
Buy the part, double the price.
It’s easy to remember, easy to calculate and gives you a 100% markup.
But remember, doubling the price does not give you a 100% margin. It gives you a 50% gross margin.
For example, buy a part for $100 and sell it for $200:
- Cost: $100
- Selling price: $200
- Gross profit: $100
- Markup: 100%
- Gross margin: 50%
The bigger issue is whether doubling every part makes sense.
Consider a $10 part.
Double it and you sell it for $20. You’ve made $10 gross profit.
That part might still require someone to identify it, order it, receive it, check it, enter it into the estimate and deal with it if it’s wrong.
Now consider a $1,000 component.
Double that and the customer is being charged $2,000.
You’ve made $1,000 gross profit, but the selling price may now be difficult to justify when the customer can easily compare the price of an expensive component online or get another quote.
That’s the problem with using one rule for every part.
Doubling the price might work perfectly well for some parts, but it can produce too little gross profit on inexpensive items and a very large markup on expensive components.
That is why a tiered parts pricing system can make more sense than simply doubling everything.
How tiered parts pricing works
The basic idea is simple:
Lower-cost parts receive a higher percentage markup, while expensive parts receive a lower percentage markup.
You’re trying to produce a sensible amount of gross profit from each transaction while keeping the final selling price realistic.
For example, a workshop might treat these differently.
Small consumables and inexpensive parts
Think bulbs, clips, seals, filters and small fittings.
These might need a relatively high percentage markup because the dollar value is small but the handling cost is still there.
Everyday repair parts
Brake components, sensors, belts, service parts and similar items might sit in the middle of the pricing structure.
High-value components
Turbochargers, transmissions, engines, expensive electronic components and other big-ticket parts may need a lower percentage markup because even a modest percentage produces a reasonable dollar return.
There is no universal matrix that every NZ workshop should copy.
Your supplier pricing, type of work, location, overheads, customers and competitors are different from the workshop down the road.
The important part is having a deliberate pricing system instead of making the number up each time.
Look at gross profit dollars as well as percentages
Percentages are useful, but don’t let them become the only thing you look at.
Suppose you sell a $20 part for $40.
That’s a 100% markup and a 50% margin.
Sounds fantastic.
But you’ve made $20.
Now suppose you buy a component for $900 and sell it for $1,200.
That’s only a 33.3% markup and a 25% margin.
But you’ve made $300 gross profit.
Neither percentage tells the complete story by itself.
A good parts pricing strategy considers both:
What margin are we making?
And:
How many actual gross profit dollars are we making?
Ultimately, dollars pay the rent and wages.
Don’t forget freight and other costs
Another easy mistake is basing markup on the supplier’s part price while ignoring the other costs of getting it into the workshop.
Suppose the component costs $400 and freight is $35.
If you calculate your selling price using a $400 cost but actually spend $435 getting the part through the door, your real margin is lower than you think.
The same applies to other costs that are directly associated with buying or supplying parts.
Your workshop management or accounting process needs to give you a realistic cost figure, otherwise your margin can look healthy on paper while the bank account tells a different story.
Warranty work has a cost too
Parts don’t always behave themselves.
Sometimes the new component fails.
Sometimes you spend half an hour talking to the supplier.
Sometimes the supplier replaces the part but nobody pays you for removing the failed one and fitting the replacement.
Sometimes you end up absorbing the whole problem to keep a good customer happy.
That’s part of the commercial risk involved in supplying parts.
If your parts pricing leaves virtually no margin, there is nothing available to absorb those occasional problems.
One bad comeback can wipe out the profit from several jobs.
What about customer-supplied parts?
This is where things get interesting.
A customer has found a part online for less than you normally sell it for and wants you to fit it.
From their perspective, they’re saving money.
From the workshop’s perspective, you’ve lost the parts margin but can still end up with many of the headaches.
Is it the correct part?
Is the quality acceptable?
What happens if it doesn’t fit?
What happens if it fails?
Who pays the labour to remove it again?
Every workshop needs its own policy on customer-supplied parts.
You might choose not to fit them at all. You might fit them under clearly defined conditions. You might alter the labour pricing because there is no parts income contributing to the job.
The important thing is that it should be a business decision rather than something made up at the counter each time a customer asks.
Don’t price from supplier RRP alone
Supplier recommended retail pricing can be useful information.
It shouldn’t necessarily be your entire pricing strategy.
Your buying price may change. Discounts can vary between suppliers. Freight can change the real cost. Some products are extremely price-sensitive and others aren’t.
The workshop still needs to know:
What did this actually cost us?
What are we selling it for?
How much gross profit is left?
What margin did we achieve?
If you can’t answer those questions reasonably easily, it is difficult to know whether your parts sales are actually profitable.
Consistency matters
Parts pricing also becomes messy when everyone does it differently.
The workshop owner doubles everything.
The person at the front counter looks at retail price.
One technician rounds the figure up.
Another uses whatever price they remember from the last job.
Now two customers can be quoted completely different prices for essentially the same part.
A defined pricing structure removes a lot of that inconsistency.
It also makes reviewing performance easier.
If the business has a parts pricing policy and the actual gross margin is consistently below what you expect, you can investigate why.
This is also something that can be built into your estimating process rather than calculated manually every time.
The estimating solution from itsallauto.com is built into the eWOF system and allows you to set your own parts margins using a pricing table, so different markups can be applied depending on the cost of the part.
If you don’t already have a parts pricing structure, you can use the default table built into the system and adjust it later to suit your workshop.
That means the person creating the estimate doesn’t have to remember which percentage to use or work it out from scratch every time. The pricing rules are applied consistently, while the workshop remains in control of the margins it wants to achieve.
Without a system, there is nothing meaningful to compare against.
Review what you’re actually achieving
You don’t need to change every price tomorrow.
Start by looking backwards.
Take a reasonable period of completed work and find:
- Total parts sales
- Actual parts cost
- Gross profit dollars from parts
- Gross margin percentage
- Any freight or purchasing costs not included in the recorded part cost
- Credits and returns
- Warranty-related losses
Then look deeper.
Are cheap parts producing enough dollars?
Are expensive components being marked up so aggressively that you’re losing jobs?
Are certain suppliers producing much better margins than others?
Are staff overriding prices?
Are you quoting from an old cost price?
Are freight charges disappearing into overhead rather than being recovered?
Once you can see what is happening, you can decide whether anything actually needs fixing.
Being busy doesn’t automatically mean you’re making money
This is the bigger point.
A workshop can have every hoist occupied, phones ringing and two weeks of bookings ahead and still have poor profitability.
Turnover by itself doesn’t tell you very much.
If labour is underpriced and parts are being sold with inadequate margin, doing more work can simply mean doing more underpriced work.
Parts pricing is only one part of workshop profitability, but it’s an important one because small pricing decisions are repeated across hundreds or thousands of transactions.
An extra $5 or $10 gross profit might look irrelevant on one invoice.
Repeated across every suitable part sold during the year, it becomes a very different number.
A good parts pricing system doesn’t need to be complicated
You don’t need a 40-page spreadsheet and an MBA.
A sensible system should answer a few basic questions:
- What does the part really cost us?
- What price should we sell it for?
- How much gross profit does that produce?
- What margin are we achieving?
- Is that appropriate for this type and value of part?
- Are we applying the same rules consistently?
Once those numbers are visible, you can make informed decisions instead of relying on gut feel.
Better still, build those rules into the way you create estimates so the correct pricing is applied consistently rather than relying on someone remembering the right markup each time.
The itsallauto.com estimating solution is built into eWOF and lets workshops create their own parts margin table or use the default table already built into the system.
You stay in control of the margins, while the estimating system does the repetitive calculation for you.
The goal isn’t to charge the highest possible price for every part.
It’s to charge a fair and sustainable price that covers the cost and risk of supplying parts, produces a reasonable return for the workshop and still represents value to the customer.
Because if you’re buying the parts, organising the parts, guaranteeing the work and carrying the risk, your workshop needs to make money on them.
Otherwise you’re providing a parts procurement service for free.
