ON THE MARK"Excuse me Sir . . . " Have you ever asked a question in the middle of a class and then later realized that your question opened up a can of worms? It all began when our local parts vendor passed out a sign-up sheet for an evening exhaust clinic. A large exhaust supplier was sponsoring the clinic. Both subjects that were going to be discussed caught my attention: First, a new, simpler muffler warranty policy, and second, how to increase profits on exhaust sales. Both topics sounded interesting. The new warranty policy really got my attention. This exhaust system manufacturer has changed its warranty policy several times in the past few years. Keeping up with which part numbers were subject to warranty and which were not was getting to be a daunting task. In addition, our customers were getting confused about the warranty policy. This was especially true considering that we weren't even sure what the warranty policy was. At any rate, my brother and I decided to attend the seminar. Not only was the food good, but the entire evening proved to be an eye opener. The exhaust
manufacturer's representatives gave a nice presentation on the new warranty policy. Finally, they were settling on a policy that was less confusing and easier to implement. No more having to look in a chart to see which muffler part numbers had a lifetime warranty. Also, gone was the customer's responsibility of having to send in the warranty paperwork and fee. The installing shop would now purchase the warranty. Simply stated, if I want my customers to have the lifetime warranty, I purchase the warranty as an additional $12.95 line item on the parts invoice. That sounded fair to me. I figured we'd just include the warranty item on every muffler and add it to our cost. This way, every customer gets the lifetime warranty. Now the confusion of who bought the warranty and who didn't would be over. Everyone gets a lifetime warranty. Finally, gone would be all my free replacements to quiet down those past upset customers that "insisted" they'd sent in the form and the money. Later, we got to the topic of increased profits on exhaust system replacements. The representatives wanted to bring our attention to an alternate muffler line that they sold. The representative stated that these alternative mufflers cost about 20 percent less than the brand-name mufflers we had been purchasing. They stated that the mufflers were identical but were priced less and had a separate part number. Several shop owners asked questions as to why the same muffler would be boxed cheaper with a different part number. Although their answer was not clear, it was some sort of marketing reason. The representatives stated that they wanted to offer a lower-priced muffler that was of identical quality as its brand name counterpart. Then one representative said something that caught me off guard. Frankly, it both surprised and confused me. The representative said that they were offering this line as a response to comments about their list pricing. He went on to state that he was aware that the shops "just couldn't charge the list price anymore." Now I started wondering if we had not been charging enough. We have always used the list price, or more, depending on the margin we need for markup. Then I became really confused when the representative commented that many shops were marking the price down. At that point I raised my hand and said: "Excuse me sir. Did you say mark the price down? Why would I mark the list price down?" Suddenly, the entire room was quiet. Gradually, people started whispering back and forth. Now I realized that I had opened a "Pandora's Box." The representative asked me, "You're actually charging the list price?" I replied: "Yes, why wouldn't we? After all, this industry is getting more complex and difficult. Why shoot yourself in the foot by lowering your gross profit on an exhaust job?" So, back and fourth the conversation went. Evidently, the exhaust manufacturer had gotten input from some shops that the list price was too "high." I certainly never thought it was. Granted, the 50 percent markup on exhaust systems makes it one of the more profitable items to install. Then again, it's not that far from other hard parts that we make a 40 percent to 60 percent profit. I just could not fathom why some shops were lowering the list price. I had the floor anyway, so I decided to comment further. Everyone is concerned that they might price their job higher than another shop. Then there is the concern about being higher than the dealer. Also, I went on to mention that the chance of them being higher than the dealer was unlikely. I learned several years ago that the list price on your dealer's parts slip is often not the list price used in its service department. My experience has shown that many dealers use a price matrix table. With this pricing matrix they can add 20 percent to 45 percent or more to the manufacturer's suggested retail price (MSRP) when its service department is installing the part. No longer is the MSRP gospel. Dealers are finding that the old 40 percent margin from the factory isn't enough to pay the bills anymore. We realized that several years ago, too. Every part we buy and sell is priced by our own matrix table. Sometimes the list price is sufficient. Sometimes it isn't. When the latter happens, the matrix creates a higher list so we can maintain our profitability. After all, how many "low-ball" price shops can you remember that have come and gone. Perhaps if they had done their financial homework, they would have figured out what their business really needed to operate and grow. It's no different from pricing your labor rate. Don't just make it "higher than this guy" or "lower than that guy." Where do you want to be? What tools does your business need next year? How big should your advertising budget be next year? How about the increase in health care costs? I even know a shop that charges more than the dealer. How can he do that? Believe me, he does. He also gives his customers substantial extras that other independents and dealers don't. Then there's that little caveat called "perceived value." What is perceived value? It is the perception that the consumer forms based on brand name and price. It's a funny sort of marketing magic. A box of Kleenex is perceived to be better than its generic counterpart. The higher-priced shop is perceived to be better than the lower priced shop. Do you remember the motto "You get what you pay for"? They might not want to admit it, but the consumer knows it well. Is the owner working 90 hours a week? If so, why? Why can't the owner survive on a 40- or 50-hour workweek? Think about it. Then again, the reverse is also true. If you don't want to buy the latest equipment and you don't want to get the latest training, then you should not be the more expensive shop. The bottom line is, it's your bottom line. In the end, I did not mean to turn the seminar on its ear. I just wanted to provide a different viewpoint about all this talk of lowering the list price. Later that evening, several shop owners came over and thanked me for my comments on pricing strategy. Many of them admitted that they were unaware that dealers were adding to the MSRP. As a final note, the parts store owners that sponsored the presentation made an interesting comment. They are seeing a new trend in parts pricing lately. They are finding that more companies are moving to eliminate the list price altogether. In the future they suspect most parts companies will no longer post a list price. When that happens, many shops will be forced to calculate their own list price. Perhaps that simple industry trend will prompt more shop owners to finally calculate their cost of doing business.
