In the modern automotive industry, where the margins on new car sales often approach zero, competent management of the financial performance of each department becomes critical. Abbreviation GM 1 (Gross Margin 1) is one of the key metrics used by CFOs and dealership owners to evaluate profitability. Understanding this indicator allows you not only to balance debits with credits, but also to build a strategy for survival in conditions of fierce competition.
Many novice managers confuse gross profit with net profit, not realizing what exactly Gross Margin shows actual sales performance before operating expenses. If you are planning to open your own auto repair shop or dealership, ignoring this figure can lead to fatal errors in pricing. Let's figure out what's hidden behind this number and how to interpret it correctly.
Unlike a simple markup, margin takes into account the cost structure and shows what share of revenue remains in the company after paying the direct costs of the product or service. In the auto business, this is especially important, since the structure production costs here is complex and includes many hidden components. Without clear control over GM 1, it is impossible to build a sustainable business model.
Explanation of abbreviations and basic concepts
Term GM 1 comes from English Gross Margin, which means gross margin or gross profit. The number “1” in this context often indicates the primary level of calculation, that is, the marginality of the main activity without taking into account indirect overhead costs. In some dealer holdings, GM 1 refers to gross profit from car sales, and GM 2 refers to profit from service and sales of spare parts.
It is important to distinguish between the concepts of margin and markup, since they are calculated using different formulas and give a different idea of profit. Extra charge is the percentage of cost that is added to the price, while margin is the percentage of profit in the final selling price. An error in calculations here can cost a company millions of rubles, especially when working with expensive premium cars.
Formula for calculating markup vs margin
Markup = (Profit / Cost) 100%. Margin = (Profit / Revenue) 100%. With a markup of 100%, the margin will be only 50%.
For correct analysis, it is necessary to use a unified calculation methodology in all departments of the company. If the accounting department calculates according to one scheme, and the sales department according to another, management reports will become useless. The key is to include in the cost price all direct variable costs associated with the acquisition or production of the unit sold.
Calculation formula and cost structure
The basic formula for calculating gross margin is quite simple: subtract the cost of goods sold from revenue. However, in the auto business, the concept of cost requires a detailed explanation. It includes not only the purchase price of the car from the manufacturer, but also logistics, customs duties, pre-sale preparation costs (PDI) and recycling fees.
When calculating GM 1 for the service division, the formula remains the same, but the content of the expense items changes. Here, the cost consists of the cost of purchased spare parts, the cost of standard hours of work for mechanics (if they are piece workers) and consumables. Operating expenses such as rent, utilities and administrative salaries are not typically included in the GM 1 calculation.
☑️ Checking the cost structure
Below is a table showing the approximate structure of gross profit formation for a dealership:
| Expense / Income item | Amount (rub.) | Share in revenue (%) | Impact on GM 1 |
|---|---|---|---|
| Sales proceeds | 3 000 000 | 100% | Base |
| Purchase price (EXW) | 2 400 000 | 80% | Reduces |
| Logistics and customs | 300 000 | 10% | Reduces |
| Pre-sale preparation | 30 000 | 1% | Reduces |
| Gross Profit (GM 1) | 270 000 | 9% | Bottom line |
Analyzing the table, you can see that even a small change in the purchase price or logistics costs significantly affects the final figure. This is why large dealer networks are striving to optimize supply chains. A 1% reduction in logistics costs can increase GM 1 by tens of percent in absolute terms.
GM 1 differences in sales and service
In the automotive business, it is customary to divide activities into two main streams: sales of new and used cars (Sales) and after-sales service (Aftermarket). Indicator GM 1 for these areas is radically different in nature and normative values. In the new car sales segment, margins are historically low, often as low as 3-7%.
The situation in the service department looks different. Here, the gross margin on spare parts can reach 20-30%, and on standard labor hours - 40-50% and higher. Exactly high profitability The service allows dealers to compensate for low profits from the sale of hardware. Many centers operate at zero or even negative sales in order to capture a client base for future service.
Use cross-selling in service: offering additional work during scheduled maintenance can increase the GM of 1 division by 15-20%.
Managing these two streams requires different competencies. The sales manager fights for every percent of the discount so as not to go into the red, since his margin of safety is minimal. The service master, on the contrary, has more opportunities to generate a check by selling additional services and original accessories. Understanding this difference is critical for building a personnel motivation system.
The impact of manufacturer bonuses on margins
One of the specific features of the auto business is the system of bonuses from auto manufacturers (OEM). Dealers often sell cars at minimal or even zero markup, expecting to receive compensation at the end of the quarter or year if they meet the target. These bonuses directly affect the final GM 1, but their inclusion in operational reporting requires caution.
The problem is that bonuses are “tomorrow’s” money. If a dealer doesn't meet sales targets or service quality standards, they could miss out on a significant portion of their expected profits. In this case, a retrospective recalculation of the marginality of all cars sold may show a negative GM 1 for the period.
⚠️ Attention: Never plan operating expenses based on expected bonuses from the manufacturer. Consider them as net profit that goes towards development or dividends, and not towards covering current liabilities.
Financial models should be based on a conservative scenario, where bonuses are either not taken into account at all or are taken into account at a discount. This allows the company to stay afloat even in the event of failure to meet planned targets and loss of part of the remuneration from the plant. Flexibility in management financial flows It’s more important here than a pretty picture in the report.
Strategies for Improving GM Performance 1
To increase gross margins, dealerships use a set of measures aimed at both increasing revenue and reducing direct costs. One of the effective ways is to develop the sales of used cars (Trade-in). In this segment, the dealer himself sets the purchase price, which gives more room for maneuver and obtaining a high marginality.
In the service, improved performance is achieved by increasing the conversion of customers into the purchase of additional work and spare parts. The introduction of CRM systems and automated maintenance reminders helps bring customers back. Also an important factor is inventory control: excess spare parts freeze money, and their absence leads to lost orders.
The optimal strategy for a dealer is a balance between low-margin sales of new cars for volume and high-margin service for profit.
Another direction is the sale of financial products and insurance (F&I). While technically this doesn't always fall into the classic GM 1, in the dealership's advanced profitability management (P&L) model these earnings are often aggregated. Commissions from banks and insurance companies have almost 100% marginality, since they do not require the purchase of inventory.
Typical mistakes when analyzing efficiency
One of the most common mistakes is mixing gross and operating profit. Managers can see high GM 1 and consider the business successful, forgetting that huge expenses for rent, marketing and administrative staff payroll can completely “eat up” this profit. It is important to always look at the full picture of the P&L report.
Another mistake is ignoring customer acquisition cost (CAC). If 60 thousand rubles are spent on advertising to sell one car with a margin of 50 thousand rubles, then the actual profitability of the transaction is negative. Analysis unit economy should be carried out regularly to identify ineffective sales channels.
⚠️ Attention: Avoid dumping prices in order to meet your sales plan. Artificially lowering the price destroys the market and teaches the client to buy only on sale, which in the long run reduces the average bill and the overall profitability of the business.
It is also worth mentioning the mistake of ignoring indirect costs of logistics within the company. Moving cars between sites, storing uninsured cars or downtime in the pre-sale preparation area are all hidden losses that reduce the real GM 1, but are often left out of standard reports.
FAQ: Frequently asked questions
What is considered a good GM 1 for a car dealer?
The normal gross margin for new car sales is considered to be between 3% and 7%. For service maintenance and sales of spare parts, a margin above 25-30% is considered a good level. However, these numbers may vary depending on the brand, region and current economic situation.
What is the difference between GM 1 and EBITDA?
GM 1 (Gross Margin) is gross profit, which shows the efficiency of production or purchase of goods. EBITDA is earnings before interest, taxes, depreciation and amortization and reflects the operating efficiency of the business as a whole. GM 1 is an integral part of the EBITDA calculation.
Can GM 1 be negative?
Yes, GM 1 can be negative if the vehicle is sold for less than its cost (purchase price plus direct costs). Dealers sometimes take this step to fulfill plans, receive bonuses from the plant, or free up warehouse space for new arrivals.
How often should the cost be recalculated for GM 1?
Ideally, settlement should occur in real time for each trade. However, in practice, many companies use the weighted average cost of inventories and recalculate the figures monthly. For precise control, it is recommended to use the FIFO (First In, First Out) or individual accounting method.