The factory-dealer relationship is anything but a level playing field, and unfortunately the behaviors of some manufacturers have necessitated state laws to protect dealers. These laws cover a myriad of issues, but one that is critical to your bottom line exists in 40 states, with more on the way.
For years most dealers have submitted for annual increases to their warranty labor rate, but have been stuck with an artificially low parts mark-up stipulated in their dealer agreements. This mark-up is typically 40% over cost, although some manufacturers will pay you list or MSRP. By the way, don’t be fooled by the “list” claim you may hear; you are not collecting 67%, which is anecdotally thrown around by your factory rep, or by your managers – you are most likely being paid a mark-up in the low to mid 50s.
Based on favorable state laws, you are entitled to collect “retail” from your manufacturer for parts used in a warranty claim. No, retail is NOT list price or MSRP; in most cases it is clearly defined in the law. Basically, retail is what your customers pay you for a warranty-like repair. In a store with typical pricing and discounting practices, the mark-up normally falls in the 75% to 85% range. For dealers utilizing a list pricing model, you should expect something in the 60% range. So even in a conservative pricing environment, a dealer should expect to improve his warranty gross profit by 50%; however, something on the order of doubling the gross is very realistic. This is a one-time process, and does not need to be repeated, unless you materially change your parts pricing strategy.
This is not to say that the manufacturer will simply lie down and grant you a 100% improvement in your gross. First of all, the laws mandate a submission, and detail what is required of the dealer, but that’s just the beginning.
Several things need to be considered in order to ensure the best possible result:
Thorough understanding of the law – Rest assured certain manufacturers will read the statute differently from you. Sometimes the positions they take are rather shocking, including those that will simply refuse to follow the law, or others that will attempt to include non-warranty-like repairs in a deliberate attempt to lower your mark-up.
Following the manufacturer’s protocol – It’s critical to understand the factory’s guidelines for the inclusion or exclusion of various aspects of the submission; each of them have different rules, and they typically won’t disclose all of them to you. If you can determine what they are, you should follow them within reason; do not be combative, or send up “legal signals” out of the gate.
Optimization – Absolutely key to this process is achieving the best possible result, and that can only be done through the proper selection of your submission sample – this is something that should not be left to chance or inferior technologies. Missing your mark-up by even a few points can cost you thousands every year, perpetually. Do yourself a favor, and explore this aspect with some attention to detail – it will be worth it to you in the long run.
Warranty Auditors – Beyond technology, however, is the need for a thorough audit process. Your declaration will be scrutinized by factory auditors that know every nook and cranny of countering retail warranty submissions, and you should have someone familiar with their techniques, in order to preempt or refute their sometimes-questionable positions. Here again, it is better to get along with these folks, and in many cases, this is not a problem; however, without naming any specific manufacturers, some are extremely difficult.
Factory Responses – In many cases your approval will not be smooth, and the manufacturer may rebut your calculations, or in some instances, summarily reject your submission. Responding in the proper manner is critically important, since it could be the difference between achieving a substantial increase in your warranty parts gross, or obtaining nothing at all. There are many dealers that have re-submitted two, three or four times over the course of a year or two, costing themselves multiple six figures in lost profit.
The bottom line is that you have an extraordinary opportunity to receive a fair reimbursement for the parts utilized in the warranty work you perform. If this process is approached in a judicious and professional manner, you can quite possibly double your warranty parts gross profit. There are many pitfalls for the uninformed, but tremendous upside for those that perform the submission process properly.
Author: Joe Jankowski
Joe Jankowski is Managing Partner with Armatus Dealer Uplift, which has performed over 3,000 successful retail warranty parts submissions to 24 manufacturers in 40 states.