In business, as in life, you’re either improving or declining, growing or shrinking – there is no middle ground. In today’s ultra-competitive durable goods industry, you’re either evolving your business to compete faster and stronger while delivering a superior customer experience or you’re allowing it to stagnate and erode, a formula which is sure to capture the (negative) attention of your customers and shareholders.
With recent sharp declines in the orders of durable goods (airplanes, industrial machinery and other products designed to last at least three years), followed by orders falling 2.8 percent in February 2016, 2.8 percent in May and plummeting 4 percent in June, many manufacturers are experiencing declining revenues and profits.
So, how can manufacturers work with this downturn and still improve margins? Today’s most innovative companies are turning to their post-sales service businesses for relief. Exploring profit and revenue opportunities in a company’s post-sale service businesses should not come as surprise, with upwards of 25 percent of manufacturing companies’ total revenues and 50 percent of their operating margins coming from post-sale service.
While many executives are keenly aware that pricing is a very powerful revenue and profit lever, they often overlook the profit opportunities associated with optimizing the prices of their service parts inventories, which can sometimes be measured in tens or hundreds of millions of dollars!
When it comes to service parts pricing, manufacturers’ pricing functions fall into one of two camps: Leaders and laggards. Below, I outline the two categories and provide tips for ensuring you are leading a top-notch pricing program.
Service Parts Pricing Laggards
Many manufacturers continue to resist the call for change, and cling to the comfort of the status quo by relying on simple cost-plus methods to price service parts. This basic approach has several shortcomings, which can impact a company’s ability to use service parts price optimization as a profit and revenue lever. Shortcomings include:
- Labor intensive manual pricing processes resulting in infrequent price changes
- Slow response to market conditions, impeding a company’s ability to capitalize on revenue and margin opportunities
- Basic pricing processes that do not account for market dynamics such actual street prices, relative price sensitivity, price leadership and if a part is captive or competitive
- Parts priced too low result in lost profits while parts priced too high minimize market share
Service Part Pricing Leaders
While groups of service parts pricing laggards still accept the inefficiencies of the spreadsheet-enabled, cost-plus approach to service parts pricing as convention, a fast growing group of visionaries view this process as a sub-optimized compromise to the technology driven service parts pricing processes available today.
Fortunately, durable goods manufacturers no longer need to settle for the status quo—the manual, old way of managing service parts pricing. Today’s automated pricing solutions take the “status quo” out of the equation and deliver a pricing process that harvests the revenue and profits manufacturers need now. The benefits of dedicated service parts pricing solutions include:
- Increased service revenues up to five percent and gross profit margins more than seven percent
- Accelerated reactions to market and competitive changes
- The ability to identify both underpriced and overpriced parts
- Improved negotiations with suppliers
- Visibility into local pricing and market trends
In every generation, innovations transform the status quo in businesses. In response, some have chosen to cling to a familiar pattern that exists in this dynamic of technological innovation — a pattern that should cause discomfort in every business leader. It is the disturbing regularity with which industry laggards adhere to convention, resist the call for change and cling to the comfort of the status quo.
Others, of greater vision, wisdom and courage, embrace innovation to make the leap from laggard to leader, capitalizing on the transformational benefits delivered through technology.
A fast-growing list of forward-thinking companies, including the likes of Hitachi, Volvo and Morbark, have made the switch from the perceived safety of the status quo to the next generation of service parts pricing —a smarter, more efficient and automated approach—an approach that delivers the much needed improvements in revenue and profits that shareholders applaud.