BUSTING THE GROSS PROFIT MYTH!

By Terry Keller

Who should you listen to when it comes to setting a target for your gross profit percentage in your shop?

There are a LOT of opinions out there, but you don’t have to look any farther than your categories of expenses over the last decade to know that something’s not right with your profits…those expenses not going down as a percentage of your sales, they’re going UP!

This is the TRUTH about where you should be setting your Gross Profit Percentage target.  It’s the key to surviving inflation, rising prices, and other problems in your shop!

 Shop owners are surrounded by myths…misconceptions about how to grow profits, how to attract great customers, and how things should and shouldn’t be in their shop.

These myths lead owners to accept decreased profits, low-quality customers, long hours, and small paychecks as simply “part of owning a shop.”  Let’s bust these myths and find the TRUTH!

Myth-conception

A major myth-conception among independent repair shop owners is the target for gross profit percentage they should hit. Trainers, so-called “gurus,” old-timers, and newcomers are all over the board with their beliefs and advice. Who is right? Who should you believe?

Reality

You don’t have to believe any of those “gurus,” “experts,” or old-timers to know something isn’t right with your profits. All you have to do is look at all of your categories of expenses over the last decade and observe how many of them went down.

How many of them went down as a percentage of sales? If your shop is like mine and 99% of the ones I have seen, all but maybe 1 or 2 categories of expenses went up as a percentage of sales. Everything is going up!

What can you do?

Of course, it’s important to squeeze bloated expenses down – it’s more important today than ever. But much more important is the need to manage and control gross profit percentages in each sales area – parts, labor, and sublet. Unless you do this, you may be doomed to failure.

Reality #1: You must pay either way

There are only 2 sources from which to pay expenses in your shop – from gross profit or from net profit. If the growth of your gross profit has not kept pace with expenses, then you were forced to pay them out of net profit.

In other words, if your net profit has gone down over recent years, then your gross profit has not increased as fast as your cost of doing business.

Reality #2: Inflation isn’t helping

If you made $100,000 in the year 2000 and you made $100,000 in 2010, you lost about 20% of your buying power to inflation. In other words, $100k in 2000 is worth about $80k today.

This is why you must measure gross profit, expenses and net profit as a percentage of sales and not just in dollars. This helps you actually see if you are going backward or forward.

Want to know the rest of the REALITY?  Here’s what you CAN do in this and ANY economy to control gross profit!

Most of the “gurus,” “experts,” and old-timers are teaching the wrong targets to hit when it comes to gross profit percentage.

Nearly every category of shop expenses has gone up over the last decade, and unless you control your gross profit percentage, you’re doomed to failure.

The good news?

Reality #3: You CAN control and improve gross profit percentage!

A huge myth-take that some consultants are making is to advocate lower prices and lower average ROs during this current downturn.

The reason they are advising their clients to “allow” these things to happen is that the rest of their teachings and systems are not adequate to compete and provide high value in this economy.

But remember…if you lower your gross profit percentage, that means you have to pay your expenses out of net profit! And whose money is that?  The consultants? The advice-giving bloggers? The trainers?

Oh, NO – it’s YOUR net profit, YOUR MONEY! If you don’t control it, no one else will!

If you don’t do all the things you MUST do, such as…

• Advertise and bring in the right customers
• Provide the best customer service and value to your customers
• Take great care of your employees
• Measure, train, and hold them accountable to do great work and sustain great customer service

…then the only alternative is to reduce your gross profit, try to compete on low pricing, and hope you don’t go broke. To top it off, your pay check will be pretty meager if you can take one at all.

Therefore…

There is a choice, and it’s YOUR choice: die slowly as you have been, or decide to get serious about fixing some things you have ignored and let go for far too long.

Gross profit can be managed to a satisfactory level – even in this economy. It can pay your bills and peel off a substantial net profit for you. Parts gross profit and sublet gross profit percentage are the two easiest numbers to fix in your shop if you use a good pricing matrix.

Improving labor gross profit percentage requires some good planning and management skills and takes longer to fix — in some cases a few months, but may take up to a year.  Significant gains can be made in the short term through the introduction of a good incentive pay plan.

Now, a word of caution – you can’t just raise your prices and keep giving the same low-value service you always have to the same old low-value customers.

Fixing your gross profit requires attention and an investment from you to grow your business in all the aspects needed for high profitability today.  You can do this if you want to make more money and be safe. The choice is YOURS!