Markup vs. Margin: A Costly Confusion in the Parts Department

One of the most common—and costly—mistakes made in Parts Departments across the country is the confusion between markup and margin.

The Situation

Many Parts Managers are tasked with achieving a 35% Gross Margin on part sales. But in pursuit of that goal, they often make a critical error: they mark up parts by 35%, thinking it will get them there.

It won’t.

In fact, a 35% markup only delivers a 26% gross margin. That shortfall can leave tens of thousands of dollars in unrealized profit on the table over time.

Let’s Look at the Math

Let’s say you buy a part for $10 and you mark it up 35%:

• Sale Price = $10 + (35% of $10) = $13.50

• Gross Profit = $13.50 - $10 = $3.50

• Gross Margin = $3.50 / $13.50 = 25.92%

That’s not 35%. Not even close.

So What Markup Do You Need to Hit a 35% Margin?

If your goal is a 35% Gross Margin, you need to mark up the part more aggressively. Here's the formula:

Selling Price = Cost / (1 - Desired Margin)

For a $10 part and a 35% margin:

• Selling Price = $10 / (1 - 0.35) = $15.38

• That’s a 54% markup on the $10 cost

Bottom Line

If you’re using markup when your objective is margin, you’re likely underperforming your profit targets—without even realizing it.

At PPD Consulting, we help automotive professionals clarify these financial fundamentals and apply them in a way that increases department profitability and overall performance.  We'll also help you realize that 35% isn't the number you should be shooting for!!!