1/1/2009
Profitable Performance: ‘Walk-In’ Parts Don’t Have To Cost You
By Dave Sutton
Last year I wrote the first in a series of articles looking for Profits in Performance (see May 2008 Engine Builder, page 59). I discussed a series of plans to combat “walk-in parts,” and offered suggestions to train your customers to trust your expertise in engine building and component matching to achieve the best engine package for their individual needs.
As this shop poster from the ’50s affirms, walk-in parts have been a problem for many years.
“Selling Your Knowledge” was the name I used to describe charging your customer for one hour’s labor to prepare a shopping list before setting them free to shop the internet and catalogs to find the best deal, but on the right parts. This is not my idea of selling parts, but it has worked as a profit center for some shops.
Next we discussed “Check All Appropriate Boxes.” This is a plan to charge for every job and every minute you put into working on a customers job. The emphasis is on educating the customer to recognize that some things are free and come with the job, when you are also purchasing parts.
“Discount for Labor” and “The Package” are probably the most commonly used methods to discourage the customer from shopping the discount parts houses and robbing you of a profitable parts sale. And the last plan, “The Direct Approach,” puts it all on the line when you simply refuse to use and be responsible for an engine built with someone else’s parts.
While parts sales can be a large source of additional revenue, performance parts are often low margin, based on their competitive nature and the fact that there are many companies out there competing for this business, which in turn drives prices down. However, the size of the typical sale is usually quite large and the “profit dollar” made from the sale can be reasonable.
Lets talk about the “profit margin” versus the “profit dollar” from the sale. The most dramatic scenario comes from this statement: “I’d rather have a part of something than 100 percent of nothing.” Many of us come from an auto parts store background, so it’s not a secret that you or the owner have invested in inventory, employees, equipment and the rest of the overhead. To make it all work – to warrant keeping those parts on the shelf – the parts store needs a larger return.
In my parts store days, we shot for and were able to maintain a strong 40 percent plus gross profit margin. In other words, for every $100 sale, we took $40 to pay the overhead and expand the business. In this example, the cost of the parts was $60. I understand parts stores have to work on a smaller margin today and I give the remaining businesses credit for their ability to keep their doors open. Auto parts stores run on “Gross Profit.”
However, few machine shops keep any inventory and none have anything approaching the hundreds of thousands of dollars that a typical parts store has invested. The vast array of jobs and engine types make it almost impossible to guess what parts one needs to stock today. Modern shipping choices give most all of us next day availability to millions of dollars of parts inventory from a variety of WDs. So high profit margins, though nice when you find them, are not as necessary when you are combining labor and parts profit from non-stocking parts.
If the parts sales are for a new race motor with a parts bill in the $8-10,000 range, 12-15 percent of this as profit is a nice “profit dollar” hit. Take the money, pay your parts bill and be glad you are not trying to run a business on parts sales alone. If you have taken a down payment to start the project and cover your parts bill, and if you are working on open account with your suppliers (or even if you’re not), you should not be out-of-pocket to pay for the parts. You are making money using someone else’s capital and getting a reasonable return. Many a financial institution today wishes it could get a return like this.
“Profit Margin” is a good thing. If you are selling low- to mid-cost parts, some obsolete, or something out of the ordinary, by all means make a good margin. But you must be aware of prices in the market. And if your bill includes several parts, you may want to “mix your margins.” Try to keep the dollars you can make on some expensive parts, though the margins may be lower, and make up some points on the margin side on the loose, lower dollar sales. After all, time is money.
It might take you the same amount of time to sell a new block as it does to sell the cam bearings. Your customer will be watching his high dollar investments. He will know what a competitive price for a new block might be. He will also be less likely to question the cost of a few lower dollar parts, especially if you show you’re competitive on the block or other high priced parts.
I am a strong believer that the source of the labor should also be the source of the materials needed to do the job. I also recognize that these parts sales can be very time consuming. I highly recommend staying current on high performance parts, combinations and technology. Or, you can work with a parts supplier who can do this for you. Either way, it is always good to have a supplier who stays up on the current trends in motor sports, as well as one who can keep you aware of manufacturers’ newest product offerings.
Since we all know how influential certain magazine articles can be, it can be good to do some reading of your own. The next time your customer comes to you and is trying to associate what he just read into his project, you will be prepared to explain why this is a good idea or, more than likely, why this just won’t work for his project. A little knowledgeable explanation will bolster confidence in your ability to do the job and do it right. The old attitude that “everything in the buff book enthusiast magazines is fiction” probably won’t fly for every or even many cases today.
Mail order pricing and modern technologies have produced some respectable performance engines at reasonable prices. They may be only good for the dyno, and may not live long, but you can point out these shortcomings if you are familiar with the magazine articles and trends.
If you have not taken a down stroke, and you owe your supplier for some expensive parts, and your customer is slow to pick up his job, you may make a profit, but it may cost you a couple extra discount points at your supplier or at very least hurt your cash flow. So let’s do it right: a deposit will give you the money you need to cover the parts investment. By being “vested” in the job, your customer has a lot more incentive to pick up the job when it is finished. It will also help you qualify your customer.
I have seen far too many engines sitting on the floor of a shop, visit after visit, because the customer did not have a real idea what he was getting into or simply did not have the money to do the project they started. Many of these dust collectors are such “White Elephants” the shop has very little chance of selling the motor to someone else and recouping their money. I just can’t imagine what the shop owner was thinking when he was laying out his time and money to facilitate someone else’s pipe dream, which is now his own.
Let’s recap: You are going to make a profit. That profit may vary from part to part based on the availability of the part or the relative cost to the consumer. You are going to take a deposit and make sure your customer is invested enough in the job to ensure expeditious delivery. You will have enough capital to finance and finish the job and the customer will have a smaller bill to pay making it easier to get him back in to pick up the job.
You will pay your bills on time and take a statement discount, when available. Every percentage point helps.
You will stay current with trends and products through investigation on your own, or by using a vendor who can help steer you to the most current manufacturers and products. Along these lines, you might want to spend a little time each month reading trade magazines and some monthly periodicals (well, one in particular). This can help with your knowledge of products and trends, and help you understand where some of these crazy consumer ideas come from!
Dave Sutton has more than 33 years of automotive aftermarket experience, starting with his days as a jobber store stock clerk and driver. He currently operates a manufacturer’s rep agency in Minneapolis, MN, and is a District Sales manager for Sterling Bearing. For information about developing your own sales plan, email him at dsutton@enginebuildermag.com.