As a Moderator of NCM 20 Groups, I frequently conduct in-dealership meetings with managers who do not fully understand the difference between mark up and gross profit percentage in their parts department. This is such a common occurrence that I have even encountered it in parts managers with more than twenty years of experience! While many may get these key metrics confused, it’s important to understand their differences in order to maximize your profitability. Luckily, this concept is easy to comprehend once you understand the basic math! Don’t worry—this is simple math (no calculus required!), and I will even provide you with a simple calculation and foolproof spreadsheet to help.
Begin with Your KPIs
To begin this exercise, we need to start by examining the NCM Key Performance Indicators (KPIs) and Best Practice Guidelines. I’m going to use a domestic dealership for this example, but please keep in mind that volume import and luxury dealerships will vary. If you need a copy of the NCM Key Performance Indicators, you can download one for yourself here.
After you have the KPIs, look at your dealership and see how your gross profit percentages compare. As you can see from the chart above, monitoring each sales account separately, and not just the overall parts department gross profit margin, is extremely influential on improving the bottom line. Simply put—if you monitor only the total, you could be missing out on gross profit or failing to identify new opportunities for growth.
For example, let’s say your gross profit percentage on customer pay repair orders is below 39.5% as indicated in the KPI chart. You ask your parts manager how we can achieve 39.5%, and your parts manager tells you they are already using a 45% markup and have a little cushion. They tell you that something “must be wrong in accounting”. This demonstrates that the parts manager is having trouble understanding gross profit percentage, how it is affected and is a great indication that they could benefit from additional training on how markup works.
What is Markup?
Markup is the difference between cost and selling price. It may be expressed both as a percentage of the selling price (or the cost price) and is supposed to cover all the costs of doing business plus a profit. Whether markup is based on the selling price or the cost price, the base is always equal to 100 percent.
What is Gross Profit Percentage?
The gross profit percentage is the difference between sale amount and the cost of goods sold. It is the percentage of selling price (markup) that is turned into profit.
Margin versus Markup
Now that we have those definitions squared away, we can apply a simple formula to determine how much of your margin will be based on a percentage the parts manager expects to make. The parts manager should set a margin that ensures they will be competitive in the local market. In my example, we are looking to make a 39.5% gross profit. If our item costs $67.54, use the following formula to calculate our sale price*:
Subtract your desired gross profit % from 100. (100 - 39.5 = 60.5)
Divide 100 by the result. (100/60.5 = 1.65)
Multiply the cost of the item by 1.65 to calculate the selling price. (67.54 x 1.65 = 111.45)
To verify your gross profit dollars, subtract the cost from the selling price (111.45 – 67.54 = 43.91)
To verify your gross profit percentage, divide the gross profit by the selling price (43.91/111.45 = 39.4%)
*Results may vary slightly due to rounding.
Don’t want to do all this math by hand?
Click here to download my excel calculator. With this excel sheet, the only data you must enter is your desired gross profit percentage and the cost of your item. You’re welcome!
A Couple of Additional Tips:
Do not discount an already discounted price in parts. It will have a large negative impact on your gross profit percentage. If you discount the selling price 15% in the above example, your gross profit percentage will be reduced from 39.5% to 29%!
Post a large sign in the parts department with the number “1.67” on it. This is to remind the parts staff that when in doubt, markup the parts by 1.67 and you will achieve 40% gross profit percentage.
Here are some of the most frequently used markups and the corresponding gross profit percentages:
By understanding markup, and limiting discounts, you will achieve the benchmark KPIs for gross profit percentage on each sale account in your parts department.
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