Intro to GP Optimizer
- How Does the Optimizer Work?
- How and Why Does the Optimizer Dynamically Adjust?
- One More Note About Optimizer Adjustments
- The Optimizer Is Blind to Actual Sell Price
- Stop Micromanaging Your Parts Pricing
What is the Optimizer?
The Parts GP Optimizer is an industry-first tool designed to automatically seek and attain your parts gross profit. It employs powerful software tools to replace the manually-configured “parts matrix” approach to parts profitability.
The Optimizer is made possible by cloud-based computing, unbound by local server capacity, to collect and review an unlimited amount of inventory and sales data, no matter the size of your business. With advanced statistics and machine-learning principles, it creates a custom, “optimized”, parts markup curve based on your shop’s actual parts sales and then flexes the curve automatically as your parts sales mix naturally changes.
You tell the Optimizer your desired parts GP % and it sets your pricing to hit the target. Without any extra effort on your part, it adjusts its aim to maintain accuracy and deliver your profit goal.
How Does the Optimizer Work?
Shops make money on parts on top of what they pay for them (the cost price).
How much a part is marked up is a function of its cost: cheap parts get marked up more, and expensive parts less.
Optimizer requires you to enter three simple parameters:
#1 - The most you would markup a part you buy for cheap (“maximum markup”)
#2 - The most you would markup a part you buy for a lot (“minimum markup”)
#3 - Your Target GP %
Assuming sufficient sales data, the Optimizer will take these three inputs alone and hang a custom, perfectly smooth pricing curve for every part cost, down to the penny. It will not exceed the max markup on the left hand side, and it will never go below the minimum markup on the right hand side:
The shape of the curve is determined by your target GP % and the distribution of parts you’ve sold in the last 30 days by cost price. As the distribution changes, the curve adjusts to keep the total GP % consistent with the target.
Many folks focus on the blue line (the Optimized sell price) as the thing that’s changing. While that’s true, it changes because of the costs of what you sell, not the sell price of what you sell (more on why it works this way below).
When you think about the Optimizer, think about the COSTS of the parts you sell, and the distribution of those parts (how many do you sell of cheap, intermediate, and expensive parts, as priced to you). This is what matters and drives gross profit: the individual markups aggregated and optimized to deliver the GP % given all units’ costs.
Again, this is why the stagnant matrix fails: it’s ignorant to the quantity of parts you sell by cost. It simply marks up based on cost and not based on the frequency of those costs (and your profitability goal).
How and Why Does the Optimizer Dynamically Adjust?
The idea that your parts pricing can change from day-to-day may seem scary at first, but it’s precisely what’s missing from a traditional “matrix” approach. The matrix does not adjust; it’s stagnant. And when you fail to hit your GP target at the end of the month, you’re left to wonder what parts you undersold, and what changes you need to make.
It takes a lot of time (human time) to diagnose where you missed appropriate price points given your overall target GP % and distribution of costs of parts you actually sold (not to mention where you decide to make changes, across multiple matrices).
Don’t bother: it’s irrelevant anyway. The changes you make to the matrix in hindsight will affect the prices in the future (not the past), and who knows whether you’ll hit your target next month, with a new batch of cars and corresponding services. You’re responding to results that have already occurred, rather than being proactive as your sales mix naturally fluctuates over time.
The Optimizer reviews the parts you sold in the last 30 days (or longer if you have a smaller shop and more data is needed). As the distribution of parts by cost price changes day to day, the Optimizer flexes its curve as necessary to make sure the same GP % is represented underneath (the green space).
Note that while the data being used is from the past, the Optimized prices are being set across your entire inventory as of today. So you don’t have to sell the same parts as the past to hit your target; any part you sell will be priced for appropriate GP % now.
Therefore the parts you sell today will be priced based on the current, most accurate analysis of your GP performance and your sales history. If you sell every part every day at the Optimized price, after 30 days your GP % in the last 30 days will inherently be your GP % target.
One More Note About Optimizer Adjustments
Because the Optimizer’s curve is based on ROs over time (typically 30 days), the distribution of parts as calculated on a day-to-day basis will not wildly diverge; there will be 29 previous days and 1 new day. The Optimizer is simply re-calculating where it expects profit to come from, given these incremental daily changes, and then flexing the curve to compensate. Optimized prices will NOT dramatically change day-to-day.
Even if your service mix completely flipped overnight (from a classic restoration shop to an oil changer, for example), it would take an entire month for the Optimizer to adjust your prices to reflect the new distribution of parts costs.
The Optimizer Is Blind to Actual Sell Price
Another worry when considering this new approach is that discounting parts will inflate others. Because the Optimizer is focused solely on the distribution of parts cost (that is, how many parts you sold at what cost) you can discount at will without Optimized prices being affected.
You will not, as a guarantee, reach your target GP % if you discount every part below the Optimized price.
In this way, the Optimizer is a truth teller. If you want to make your target GP %, you must sell at the Optimized price on every part. If not, you must make up the difference with parts sold above the Optimized price somewhere, when you discount somewhere else.
While some may wish the tool to work differently, the results of such an approach (and the worry) are clear: as you consistently discount, the Optimized prices would ratchet up beyond reason, and the entire concept would fail.
Stop Micromanaging Your Parts Pricing
Repair professionals have spent decades micromanaging their parts pricing on a part-by-part, RO-by-RO basis, to mitigate the weaknesses of the parts pricing matrix. The matrix was a nice start, but then we wanted to go in and fiddle around.
While this made us feel useful, lacking a better alternative, this kind of effort is obsolete. It’s a waste of time and, READ THIS: humans are unable to deliver desired profit with any accuracy. Period.
(Not to mention the opportunity costs spent on it.)
Humans cannot (and should not attempt to) calculate sales history across many ROs, with many parts, by parts cost, and then set pricing. A computer can and should do that, and it’s called the Optimizer. We are proud to make this tool available to you, so you can get more important things done (that do require human touch).