No matter your time horizon, aftermarket price management offers industrial original equipment manufacturers (OEMs) the maximum leverage to improve margins and profit. And, to be successful, they must use a consistent set of parts pricing policies
For most OEMs, a significant piece of their total business comes from selling spare parts, wear parts, and consumables. Labor rates, contract prices, and other service costs are usually controlled and spent by the dealer network. For this reason, aftermarket parts pricing strategies and supporting policies must be well thought out and approved by a team willing to challenge the person responsible for aftermarket pricing.
There are three variables when it comes to service pricing:
- Price – how much?
- Timing of changes – when?
- Discounts – who decides and why?
Each of these variables is discussed individually below.
1. Price
There are three ways to set prices:
- Cost based
- Value-based
- Competitor-based.
Using cost- and value-based approaches has pros and cons. These have been discussed extensively in an earlier article, How Should I Price Spare Parts? which includes a suggested set of parts pricing policies
However, one point not made in that article is that cost-plus is internal-focused, while value-based is customer-focused. The cost-plus method is easy to implement, while the value-based price requires more work, and it is usually better accepted by customers.
Pricing based on duplicating or beating competitors’ prices is riskier than the other two methods for two reasons: 1) you have no idea how they came up with the price, and 2) you will have no idea when they will change the price.
The risk decreases as the number of prices you consider increases. Even if you use a product like Markt-Pilot, which helps you identify the selling price of everyday items, tracking price changes for many items can be a lot of work and result in frequent price changes. Most of these changes will make a minimum contribution to your revenue and margin.
2. Timing of Changes
Before deciding to change prices for the total product or an aftermarket part, you must know about all changes in cost, value delivered, and competitors’ pricing. This information is so important that one person or team must assume responsibility for collecting, analyzing, and sharing it with everyone responsible for setting prices. The shared information must include individual and cumulative changes since the last price change and all increases and decreases.
A few years ago, many service companies increased their prices once a year, usually by less than 3%. However, inflation changed everything.
Aftermarket parts prices now play a more significant role in overall profitability than previously. Customers are prolonging the life of their expensive equipment, either by remanufacturing the complete product or replacing worn-out parts and assemblies with remanufactured or refurbished parts. The aftermarket team prices these items. So, what should the aftermarket pricing team do?
I recently had an interesting discussion with Chris Mele, Managing Partner at Software Pricing Partners, about pricing approaches. Many best practices in pricing software apply more broadly to industrial companies.
Software Pricing Partners invented continuous monetization for software companies. This differs from continuous pricing, where the price changes moment-to-moment based on supply and demand. Continuous monetization suggests that as products and services evolve to provide more value, pricing, and packaging (your offers) should be adjusted.
Over time, prices should rise on par with the value you deliver to your customers. How these prices are presented to customers must be simple and easy to understand. This is akin to balancing simplicity versus accuracy — you can create a very accurate offer where all of your costs are covered but at the expense of customers feeling like they are “nickel and dimed” or, worse yet, confused. And, the decisions you take should be included in your parts pricing policies.
But if you create offers that are priced more simply, where your costs are more than covered, you can accelerate sales, making it easy for customers to buy. Of course, doing this requires tradeoffs, and understanding these tradeoffs and their impacts on revenues across the entire mix of customers you serve is part of the science of pricing effectively and profitably, especially during periods of inflation.
Two Examples of Timing Price Changes
Example 1
You purchase a small switch directly from the manufacturer for $10. This is the same price that the manufacturing department pays for its large-quantity buys. Major distributors sell the same switch for $15, which you also sell at that price. Then you find out the purchase price increased to $13, and distributors now charge $18.
Action: No matter how many parts you have in inventory at the lower price, you should immediately increase the selling price to $18. However, do not reprice expensive higher-level assemblies that use the part and or the final product.
Example 2
Your product includes an in-house user interface comprising an LCD touchscreen and various electronic parts, with a total standard cost of $600. The engineering department recently redesigned the assembly, and the new standard cost is $500. In addition, the new assembly is fully compatible with the older item and includes hidden buttons that provide the operator with some powerful new capabilities.
Action: Increase the price of the new assembly and all higher-level items, including the finished product. This action should be taken by the people who price the finished product. Your company deserves to earn a return on the investment in IP that created new user capabilities.
3. Discounts
When selling products to B2B buyers, your company is under constant pressure to reduce prices. Many purchasing workers earn a bonus based on how much they can reduce the initial quotation. But the aftermarket is different. Discounts should be earned!
Dealers and end users can earn or receive discounts in separate ways. Discounts can only be set by the people responsible for pricing, not individual salespeople or dealers.
How Dealers Earn Discounts
- Based on the volume of new products and parts sold.
- Customer satisfaction scores.
- By purchasing your excess inventory before they need these items — a special program.
- Number of certified technicians.
Discounts could be money saved on purchases or money for advertising and promotions.
How End Users Earn Discounts
- Purchase volume — the more you buy, the bigger the discount.
- Referrals or references provided — the more you help us sell, the bigger the discount.
Discounts are money saved when purchasing parts or new equipment.
No matter how dealers and end users earn their aftermarket discounts, there is always a quid pro quo — you do something good for me, and then I will give you something good in exchange.
Key Takeaway
People responsible for setting prices that will help the business achieve its sales revenue and margin goals have to control aftermarket pricing policies and their execution.
Related article
- Spare Parts Strategy: One of the Three Drivers of Service
- Why Inflation, Supply Chain Disruptions Could Be Good For Aftermarket Business
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. We continue to provide superior solutions to meet the needs of our clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization create or update your spare parts strategy, please contact us or check out some of our free articles and white papers here.
Image credit: Image by Gerd Altmann from Pixabay