Why dealers should stop discounting parts and service for their own operations
If I asked you why your dealership discounts parts and labour for used equipment reconditioning, new machine prep or you in house rental fleet, you'd probably give me one of three answers:
"We can't take a profit on internal work."
"It's just moving money from one pocket to the other."
"It helps us stay competitive."
All three feel reasonable. None of them stand up.
What the top-performing dealers actually do
They charge internal customers exactly what an external customer of equivalent size would pay. No exceptions for used equipment recon, no exceptions for new machine rep, no exceptions for the in house rental fleet.
There's also no regulatory reason to discount internally. Nothing requires it.
Why internal discounts do more damage than they appear to
The real cost of discounting internal work rarely shows up where you'd expect. It shows up in four places:
Distorted incentives. When internal work is priced below market, it becomes almost impossible to run fair, consistent performance bonuses for your parts and service managers. Their numbers stop reflecting reality.
False cost signals. Discounted internal rates understate the true cost of running a rental fleet or reconditioning used equipment, which is exactly the kind of blind spot that leads to poor capital decisions.
Margin that never comes back. Most sales managers price used equipment from cost upward. That means a discounted recon job doesn't get recovered later in the retail price. The saving simply evaporates, and the dealership's overall margin erodes with it.
Death by a thousand small transactions. It's rarely one big decision that causes the damage. It's the accumulation of small ones, each individually easy to justify.
A worked example
Take a dealership doing £8 million in annual turnover, with product support (parts and service) representing £3.2 million of that. External labour is priced at a healthy 60% gross margin, and external parts at 30%. Run those same margins consistently across internal and external work, and this business is sitting on roughly £1.25 million of potential product support gross profit.
Now introduce internal discounting, parts sold to the service department at cost (zero margin), and internal labour priced below the fully loaded cost of the technician doing the work. That single decision, repeated across hundreds of small jobs over a year,turns a healthy margin business into one earning barely half its potential. In this real example, the shortfall came to roughly £600,000 in a single year, equivalent to nearly seven percentage points off the dealership's overall pre-tax profit.
The mechanism is almost always the same at the transaction level. A technician spends two hours prepping a new machine for delivery. At the external rate, that adds a meaningful amount to the cost of the unit. At a heavily discounted internal rate, it barely registers and that difference is money the sales team never has to work to recover, because it was never charged in the first place.
The fix is simple, even if it's uncomfortable
Charge internal customers what you'd charge an external customer of the same size. That's it. Once that principle is in place, you can build a genuine, dealership wide margin improvement programme, because every department's numbers actually mean something.
It also changes the culture. When every revenue centre is credited fairly for its contribution, you get better cross departmental relationships and less of the sales-vs-service tension that internal discounting quietly fuels.
Parts and service exist to fund the rest of the business, to cover fixed overheads and to give sales and marketing the war chest to be genuinely aggressive in the market. Discount that engine, and you're not helping the sales department. You're just moving the cost of doing business somewhere it's harder to see.
What's your dealership's policy on internal pricing, and has anyone ever actually measured what it's costing you?
If that question is harder to answer than it should be, it's usually a sign worth digging into. At PJH Associates we run Dealer Health Audits that look right across the four pillars of dealer performance. sales and revenue growth, parts and service profitability, operational efficiency, and people and leadership. Internal pricing is exactly the kind of quiet margin leak that shows up early in that process. If you'd like a second pair of eyes on where your dealership might be losing profit without realising it, get in touch