Optimize Spare Parts Price Management to Maximize Profits from After-sales Service

After-sales service is becoming an increasingly important and strategic focus area for manufacturers around the world, but many organizations are resistant to invest in solutions solely dedicated to its optimization.

Recently, I led a virtual discussion where I covered how manufacturers can leverage Syncron PriceTM to evolve service parts pricing beyond cost-plus logic and unlock the power to price according to true value. It was a great discussion with more questions and engagement than our time allowed!

Below are the questions – with answers – that we received during the webinar and were not able to cover on the call:

When price is the major criteria for a customer in a purchase decision, how can we win with smart pricing techniques? And, for companies in a highly competitive market with alternate suppliers, including grey market competition, do they see benefits from implementing a pricing solution?

We typically see highly competitive pricing in scenarios where there are either many alternative suppliers and channels available in the market, including spurious parts. Also, when there is limited differentiation perceived and a high level of interchangeability, the pricing will be competitive.

With commercial and highly competitive parts, it is important in a pricing strategy to precisely define the local competitor set (including geographic scope) and to qualify the competitor item cross references in terms of functional fit, quality and brand value to find the correct competitive price positioning.

As a first step, you can pick one of many strategies to apply through the solution, such as automated price leadership (e.g. always 5% above competition) or price followership (always 5% below competition average), for example. The objective here is to not lose volume and protect a minimum margin without losing sales.

Another option is to apply a brand strategy with the pricing solution. In many markets, it makes sense to introduce a value brand besides the existing quality brand. This will help you position the part in different channels at different price points.

Further, you can apply a bundle method on the system where you create special parts and service bundles where you are willing to take a hit on part price and recover them in the services. This helps you push more parts to the targeted customers while not losing money on the net customer order.

In some industries (e.g. automotive) it is also common practice for OEMs to generate a new supersession item number without a technical reason in order to keep the competition at a distance.

For competitive parts with high price sensitivity, the system also helps you with an elasticity assessment which gives you a more scientific view of volume impact due to price change. This can help you arrive at a more reasonable price point which can maximize revenue.

A key point to remember is not to lose sales to begin with for such parts – especially when you are likely to lose volume faster to competition. Therefore, parts availability at high OTIFs (On Time In Full) /Service Levels should be other criteria you should consider for these items. For instance, a combination of Syncron InventoryTM and Syncron Price systems can help you arrive at the right stocking levels at each dealer/forward stocking location so that you maximize availability and therefore maximize the revenue potential.

How should we negotiate in case of parts procurement from OEMs and how do we arrive at the right price with reduced volumes?

We will not address parts supplied under a manufacturing supply contract between Supplier and OEM – since these prices are designed to follow a “economies of scale” approach and are typically a cost-plus margin or on a slight premium on previous reference prices (depending on who owns the IP for the design). Also, as OEMs make lower margins on finished goods and more on spare parts, the cost pressure only gets higher for suppliers over time.

We will address two scenarios related to spare parts here:

  • Selling to large/institutional customers: You can look at historical discounts, likelihood of sale and specific volume commitments and parts availability to price a quotation. A quotation that is built based on this complex combination of rules will ensure the highest probability of business with the customer. It will also ensure consistency on the discounts you offer across the customer base.
  • Selling to dealers: Setting up a volume commitment and payment terms commitment related rules linked to a rebate scheme is an effective way for the system to control regulation of net price to the dealers based on the volume of purchase. This can also be combined with special campaigns, liquidation schemes and more for you to sell off excess stock through your distribution channels.

Does the system provide some kind of simulation of impact on demand to avoid costly mistakes before we commit to a price?

Yes, the application includes the calculation of the price elasticity coefficient. This calculation is based on historic price decisions and customer purchasing reactions on these price adjustments. Based on the elasticity coefficient calculation the application predicts the expected impact on sales, revenue, profit and margin.

Can you give an example of how a sophisticated pricing strategy would look or is applied?

Typically, a sophisticated pricing strategy is developed on a global level under consideration of regional and market differentiation. This typically is achieved by including additional valuable data into the pricing process in order to include these differences into the calculation. Inputs that support this approach are:

  • Competitor prices and regional availability of competitor data
  • Value drivers
  • Market potential
  • Market share information
  • Item criticality
  • Item complexity
  • Price leadership

Based on these characteristics and the classification of your parts, a combination of pricing strategies can be applied to a given parts group.

For more information or to view the webinar in its entirety, please check out the replay here