Posted on October 5, 2020 by Travis Peterson
An eye-opening article in Auto Dealer Today cites dealers can generate as much as $12,000 per month in additional gross profit from retail reimbursement for warranty parts.
This makes sense when you consider that the majority of manufacturers pay on average 40 percent over cost. If a dealer is approved at 80 percent markup over cost, that dealer will in effect double warranty gross profit without increasing volume.
Think about this for a minute: You can earn twice the gross profit simply by exercising your right for retail reimbursements for warranty parts.
Your state auto association is on your side. Thanks to their lobbying work, legislation in nearly every state requires dealers be reimbursed by manufacturers for warranty parts at retail, which is your customer parts rate. California is the most recent to join the crowd with a bill that went into effect on January 1, 2020.
Due to COVID-19, there’s never been a better time to maximize revenue opportunities. Every dealer is worried about coming out on top of the current economic crisis. Now is the time to put in the effort to secure the higher rates you deserve – and come out of this crisis better than you went into it.
For example, Chantel Procell is the Fixed Ops Director for the Hiley Auto Group in Huntsville, Alabama. She recently went through the process of this type of audit for a few of her stores. “The process was pretty straightforward. I submitted to the info to the OEM. Most of our stores received 20-30% increases on the first request,” she said. “You can apply every year, so depending on the store, I have applied every year or two for some stores and get another 2-5%.”
There is no sugar-coating the truth: a typical process to increase your rate is time-consuming and costly in terms of labor hours. You must compile a lot of documents to make your case, but there are ways you can make the process more efficient and cost-effective.
The first step is to examine your parts-pricing matrix. This matrix is a chart of pricing structures for specific parts dependent on unit cost, volume sold, and discounts available. These variables can cost thousands of dollars in lost profit.
What does this mean? Simply put, the OEM is looking for consistency. When evaluating reimbursable rates, the manufacturer does not want to see large swings in what the customer ultimately pays for a specific part. For example: if the retail pricing for a part is $200, and your team is charging between $135-$200 (dependent on your volume/discount matrix), the manufacturer is going to look at the average charge. Therefore, if you are only charging 70% on average due to an aggressive discounting structure, you’ll only be accepted at the 70% rate ($140). Now anytime you sell at full retail, you are losing out on a $60 difference.
It’s crucial to examine your matrix and discount policy before applying. Most manufacturers allow you to apply only once a year for a rate increase. Although it may be beneficial at that moment to apply favorable discounts for specific customers, you must understand the potential downside that this practice causes. Maintaining a consistent and tight parts structure will give you the best opportunity to maximize your reimbursed rate, therefore increasing your profit.
The second step is to get on-board with document scanning and online archiving. Your manufacturer will not just give you the rate increases. You have to make your case and that takes documentation.
Most state laws require a dealer to submit at least 100 sequential qualifying ROs to substantiate its retail rate. These documents must be detail copies that outline per-unit cost. Missing documents or in-correct versions can result in the manufacturer rejecting your submission.
A third-party document management platform makes it easy to simply type a RO number into a search bar instead of dedicating countless hours to digging through filing cabinets and boxes. Online storage also means you can retrieve the entire list of documents at once, documents can be accessed anytime and from anywhere, and there is no risk of misfiling pulled documents once you have accessed them.
The last tip is to investigate partnering with an automotive consultant who specializes in warranty parts reimbursement analysis. These companies can help you analyze your price matrixes, inform you of the laws in your state, and essentially build the “case” to the manufacturer. They will typically be specialized in certain manufacturers and know what the OEMs require to optimize the cost reimbursement percentage.
Time is important as the sooner you submit documentation, the sooner you can benefit from higher rates. With massive amounts of data and limited employee time, the combination of a scanning and archiving solution and a trained automotive consultant is likely your best bet to optimize your warranty parts and labor markups to get results faster.
Because of the current economic situation, a lot of dealers are actively seeking ways to cut costs while boosting gross profits. Do not overlook the profit potential of retail reimbursement for warranty parts. Take advantage of a document management platform and the expertise of an automotive consultant to efficiently and cost-effectively prepare a rate increase submission that, once approved, will pay dividends for years to come.