Your dealership has a big potential profit center, and tapping into it doesn't require you to change how you do business. You can activate it easily by applying for a warranty parts reimbursement rate increase.
Many dealers know they can periodically apply to the factory for a service labor rate increase. Far fewer seem aware that most states' franchise laws also allow a retail parts markup.
Under these laws, the manufacturer must reimburse the dealer at retail rates for parts replaced under warranty. That amount can greatly exceed the cost plus 40 percent the factory typically pays.
Dealers generally don't take advantage of their right to pursue warranty parts reimbursement rate increases because they don't know about the state laws or have other misconceptions. Seek guidance from knowledgeable counsel or at least review the law in your state.
Laws in 26 states clearly spell out the submission process. Another 14 states also allow reasonable reimbursement, although their laws do not define procedures for dealers to follow.
|1 Year||5 Years|
|Yearly warranty parts sales||$400,000|
|Cost of parts||$285,714|
|Yearly warranty parts sales at 67% markup||$477,143|
|Additional profit from higher warranty parts markup||$77,143||$385,715|
|Yearly warranty parts sales at 80% markup||$514,285|
|Additional profit from higher warranty parts markup||$114,285||$571,425|
|Yearly warranty parts sales at 90% markup||$542,857|
|Additional profit from higher warranty parts markup||$142,857||$714,285|
Dealers often are wary of seeking higher reimbursement for warranty parts because they fear pushback or retaliation by the manufacturer. These are two distinct issues.
Automakers sometimes question submissions, usually by challenging the dealership's selection of specific repair orders. They may use this tactic to delay overall approval.
But manufacturers also understand that they must obey the law. So pushback and retaliation are not serious concerns, especially when the factory knows that the dealer is represented by counsel familiar with state law.
Some dealers worry that applying for a parts rate increase will be too costly and burdensome on their employees. To the contrary, the minimal effort involved in maximizing warranty reimbursement can pay off handsomely for small and large dealerships.
Even a small dealership can receive more than $140,000 a year in additional profit. The consistent stream of revenue from a warranty parts reimbursement rate increase not only adds significantly to the immediate bottom line, but also enhances blue-sky value.
Understanding your state's law is critical. Many laws allow dealers to reapply regularly for a rate increase. New York and Illinois allow two applications per calendar year; Washington permits annual applications.
If there are changes in your service department, reapplying can allow you to enhance your reimbursement percentage rate. You shouldn't seek parts or labor increases more than once a year, but you should do so periodically.
When a dealership is sold, warranty parts reimbursement rates revert to the standard manufacturer rate of cost plus 40 percent. Due diligence during buy-sell negotiations must determine whether the seller has taken advantage of the applicable warranty parts reimbursement rate law.
If so, the average level of profitability in the seller's financial statements will not necessarily stay the same after closing, because of the rate reversion. The new owner must carefully consider the timing of a subsequent application.
The service department needs to build up the requisite number of customer-pay repair orders to submit under the new dealership's name. The percentage markups in these documents should be at an optimal level.
Applying for an enhanced rate from the manufacturer typically involves identifying 100 of the highest-yielding, qualifying repair orders in sequence. Laws in states such as New York and Florida exclude low-margin operations — wholesale parts and parts used in reconditioning and regular maintenance.
Franchise laws in 10 states — including California, Michigan, South Carolina and Tennessee — do not support retail reimbursement. I urge dealers and their associations in these states to lobby lawmakers for change.
Otherwise, taking advantage of the increased profits afforded by a warranty parts reimbursement rate increase is as simple as completing the application process outlined in your state law.
You deserve it.
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