Along the lines of my recent post on why you should use spare parts inventory management software, today we’re talking about another key topic for OEMs. We’ve been diving pretty deep into the benefits of price optimization and segmentation here on the blog this year, but maybe you’re still wondering about the basics: Why should you use spare parts price optimization software?
Pricing is one of the most crucial top-line revenue levers available—because it can directly and significantly increase financial performance.
One key reason is the growing strategic importance of after-sales service for OEMs as a way to create resilience and offset potential revenue losses on new product sales. Increasing market uncertainties before the pandemic coupled with the subsequent economic downturn have led consumers and businesses alike to try and extend the life of their existing machinery, industrial equipment, and vehicles. That means manufacturers must be able to deliver the right part at the right price, right when they need it.
Price optimization is a powerful strategy for OEMs looking to make up for lost revenue and identify new margin opportunities—just a 1% price increase makes a much bigger difference to your bottom line. That’s why pricing is one of the most crucial top-line revenue levers available—because it can directly and significantly increase financial performance. And yet, many manufacturers are still relying on outdated pricing methods such as basic cost-plus strategies and spreadsheets to manage pricing across increasingly complex networks and catalogs.
In the after-sales service world, these methods are too simplistic and can result in money left on the table. Let’s look at the advantages a modern, cloud-based price optimization software solution can deliver and why it’s well worth the investment.
Sheer volume and scale
Finding the right price for every part in your catalog can be daunting. While traditional pricing solutions may be able to handle up to 10,000 products, OEMs selling parts for after-sales service can have hundreds of thousands or even millions of parts spanning different stages of a product’s lifecycle. And if you’re selling in multiple markets or countries, your pricing matrix multiplies exponentially.
A legacy system simply isn’t capable of managing this volume—at least not with any level of sophistication or accuracy. Plus, you would need thousands of pricing analysts working around the clock to manually assign the best price for every part and customer. Investing in a powerful price optimization solution will give you visibility across your entire supply chain and the ability to automate much of the work. Once you understand baseline performance, you can set goals and start to optimize.
Move beyond basic
Cost-plus parts pricing has been the gold standard for years. But with the growing volume and complexity of spare parts catalogs, strategies based on broad categories and arbitrary markups fail to account for competitive value—leading to missed margin opportunities. You need to take a wide range of commercial considerations into account to determine the optimal price for each part. With a sophisticated, cloud-based system, you can evaluate new pricing techniques and run “what-if” scenarios to see how changing your pricing method or policy will affect financial performance. From there, you can decide on the best pricing method for various parts categories.
Spare parts pricing techniques
There’s no one-size-fits-all approach to pricing. Here are just a few of the pricing methods OEMs can use for after-sales service parts:
- Competitive-based—mark up varies based on what competitors are currently doing
- Cost-plus—takes the cost to produce a part and adds a pre-defined margin, typically around 30%
- Kit-based—uses a bill of materials for multiple items needed together in a repair operation
- Statistical-based—uses historical commercial information to negotiate prices
- Supply-driven—based on what inventory you have on hand and your ability to deliver
- Value-based—drives higher margins by accounting for the customer’s perceived value of the product
- Yield-based—used to maximize profits and on-hand inventory for end-of-life parts
Get smart about segmentation
With a modern pricing solution, you’ll be able to use parts segmentation to make pricing a large volume of items more manageable—and more profitable. Price segmentation groups products together by common factors, from technical attributes to product lifespan. At the highest level, you can divide parts into commercial (widely available) or captive (proprietary). From there, you can continue to differentiate based on attributes at many levels.
Rule-based segmentation lets you easily segment products multiple ways to support differentiated pricing rules. Adding depth to your segmentation strategy helps you identify where you’ve over- or underpriced parts and adjust accordingly. But sophisticated segmentation can only be done with a sophisticated system.
Do go chasing waterfalls
The price waterfall is a method many organizations use to identify hidden costs and margin leakages at every price level. If you’re using the price waterfall and need to address more than one level, you need to be able to connect global and regional price lists to various discounts, rebates, and other special prices to figure out the optimal pocket price for different customers. An advanced pricing solution will help you understand the impact of various pricing strategies on customer net prices—another function that’s beyond the capabilities offered by legacy systems.
Data, analytics, and reporting
For organizations that haven’t invested in a modern pricing solution, lack of data can seem like a barrier to moving beyond basic pricing techniques. But without a sophisticated system, gathering data can be a challenge—you may have no choice but to scrape prices from the internet, which may be incomplete or inaccurate. To really understand how competitive your commercial parts are, compile all your field data into a single system of record. This will give you access to the competitive insights, customer insights, and sales insights you need to optimize your pricing.
Analytics also help you understand how categories develop across segments and let you drill down into the root cause of any pricing issues. With a better understanding of demand across your entire supply chain, you’re better positioned to land on that goal of “right part, right price, right time.” This will let you keep your customers happy while making the most of value drivers and margin opportunities.
Pricing at the speed of business
In today’s world, market fluctuations happen fast. If you’re not using a system that gives you real-time feedback and lets you react instantly by updating prices to reflect current conditions—you’re shooting yourself in the proverbial foot. To stay competitive and keep up with the constantly evolving business environment, choose a system that’s cloud-based, centralized, and AI-powered, enabling insight and agility at scale. It’s the only way to maintain long-term profitability and growth.
If you’re ready to take a more sophisticated approach to spare parts pricing and tap into missed margin opportunities, our Profit Discovery Program is a great place to start, as it offers a no obligation, complimentary assessment of your profit potential, based on a sample of your actual pricing data.