Friday, February 3, 2012

Protecting Collision Parts Share

By Korin Hasegawa-John

We’ve talked a lot about the “good old days” in this blog. Back before the digital revolution, when we could make our customers run the gauntlet that was our 1-800 numbers, hold times, and elusive customer service reps. Well, back in those good old days, OEMs owned the collision market. When a customer took their car to the body shop, the insurance adjuster wrote an all-OEM estimate and the car would be repaired to pre-accident condition. The customer was happy (well, as happy as they could be following an accident), the body shop was happy to use original parts, and we were fat, dumb and happy making a hefty margin on millions of dollars in collision parts sales. The only people who weren’t happy were the insurance carriers, who eventually decided they’d like to keep a little more of that money for themselves. They started using all kinds of aftermarket, “recycled” and repaired parts, all the while telling their customers that it was part of an effort to keep those nasty premiums down. And the customers bought this, hook, line and sinker. Consequently, auto OEMs’ share in the collision market went from 90% to 80% to 70% and on downward, which brings us to the present day.

OEMs are playing defense when it comes to collision parts. How do we slow, stop and reverse the market share gains of our competitors? In the auto segment, OEMs have developed price matching programs, which can be an effective way to retain market share without resorting to drastic price cuts.

The key to price-match programs is the data extracted from estimate-writing systems. Almost all collision estimates in the United States are written using one of three major estimate-writing systems – Mitchell, CCC and Audatex. OEM price-match programs rely on the data generated from these systems to feed their wholesaling dealers competitive opportunities.

How does a price-match program work? There are many variations, but the common concept is as follows:
  1. The dealer can see a non-OEM part written on an estimate.
  2. The dealer can offer to sell the OEM part in its place at a substantial discount.
  3. If the shop selects the OEM part, the OEM reimburses the dealer to help support the deeper discounting needed to make the sale.
Here’s the key: If the body shop writes an OEM part on the estimate in the first place, the dealer sells the part at their usual price and both the dealer and OEM make their ordinary margins. The price match is only triggered by the presence of competition. We keep those nice margins when insurance writes our parts, and we can price-match with the aftermarket when we need to.

So what’s the problem? Well, as it stands, most OEM systems effectively support market share, but don’t support OEM profitability. The pitfall is pursuing an easy solution rather than a profitable one.

We are fighting a losing battle when we simply go out and match prices with the aftermarket. Here’s how that process goes:
  1. The insurance rep writes the estimate and the body shop orders the parts.
  2. The dealer converts some of the aftermarket parts to OEM.
  3. The shop installs the OEM parts, saving time and, therefore, labor.
  4. The insurance rep gets promoted because he just got the insurance company more OEM parts than they paid for.
  5. In the future, the insurance rep will write even more non-OEM parts because, hey, he’ll get the OEM ones cheap! And once he identifies a part number that’s eligible, he’ll never write that part as OEM again.
Sense a problem? By offering the price match once, we’re in danger of always price matching on that part. Sure, we may be growing our market share with every price match, but if we are losing money, or barely breaking even every time, what’s the point?

Body shops universally want to install OEM parts. This is because they fit better than the aftermarket equivalents and fewer labor hours spent adjusting parts mean faster, cheaper repairs for the shop. Shops will even pay a small premium for OEM to replace aftermarket, but a straight price-match program doesn’t take advantage of this. If the shop is willing to pay more money for our product, why not allow them to do so?

How do we avoid the constant price matching, and capitalize on the premium for OEM parts? The first is relatively simple. Don’t put parts on the program until there is competition in the aftermarket. Don’t put all part numbers on the program, and have groups of part numbers that cycle in and out of eligibility. This variability in the parts list prevents your part numbers from becoming guaranteed conversions and encourages insurance adjusters to write more OEM parts.

The second requires a little more work by the dealer, and constant vigilance on the part of the OEM. OEMs can offer variable reimbursements based on the sale price of the part, rather than a straight price match to the aftermarket price. The deeper dealers have to discount, the more OEMs support them with reimbursement. This means that if the dealer doesn’t have to discount the part to make the sale, the OEM pays less reimbursement. In this way, dealers can charge the shop exactly the price they’re willing to pay for the part, maximizing their margins. This type of system is more complicated and requires more management, but can substantially increase dealer and OEM margins on converted parts. In fact, if OEMs want to get really creative they could change the pricing structure based on part types, or vehicle age, or any number of other factors.

Bottom Line: If we’re willing to dive deep into the data and take a microscope to every transaction, we can leverage price-match programs to improve profitability. As the number of non-OEM parts on estimates continues to increase, the importance of price-match programs will grow proportionately. We have incredibly powerful tools that enable us to be smart about our price matching, and squeeze all the revenue and profit we can out of these valuable programs. No one can afford to run a price-match program as a charity.

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