Why Your Spare Parts Inventory Could Be a Gold Mine

Fallout from the COVID-19 pandemic made 2020 a tough year for everyone. The economic downturn has impacted aftersales service from every angle, with supply chains disrupted, sales of finished goods dropping, and many OEMs left looking for ways to make up for lost revenue. Strategic spare parts pricing offers a great opportunity to increase revenue and profitability—a price increase of just 1% makes a much bigger impact on your bottom line. But tapping into that potential requires a sophisticated approach to pricing. If you’re not taking advantage of new techniques and solutions, you might be missing a golden opportunity.

The single price strategy – simple, but not smart

In today’s complex aftersales market, there’s no one-size-fits-all approach to spare parts pricing. A multitude of techniques can be applied across your catalog depending on factors like demand, supply, and competition for your products. One of the most commonly used techniques is cost-plus pricing, which adds a pre-defined margin to the cost of production—typically around 30%. This works well for pricing in bulk, but lacks the nuance required to maximize margins on a large catalog with a wide variety of parts. Value-based pricing is also widely used and drives higher margins based on a product’s perceived value in the market.

Other approaches include competitive-based, kit-based, statistical-based, supply-driven, and yield-based pricing. Each method offers advantages for different product segments. For example, value-based pricing works best with products where you have a unique position. But when lots of distributors or marketplaces offer the same part, you’ll want to look at how everyone else is pricing it before you determine your margin. In this case, competitive-based pricing helps you avoid over or underpricing.

Depending on the size and complexity of your catalog, you probably need to utilize a combination of pricing methods to maximize profitability—including both value-based and market-based approaches. The only thing that applies across the board is this: if you’re not using multiple pricing strategies for your parts pricing, chances are you’re leaving money on the table.

If you’re still using Excel, you’re not optimizing your margins

Legacy price management often means relying on Excel spreadsheets, which may be adequate for simple needs—a single pricing method, a limited dataset or number of pricelists, minimal ERP updates, etc. But Excel isn’t capable of managing the sophisticated segmentation needed to price a large volume of items strategically. If you have thousands or even hundreds of thousands of parts in your catalog, you should absolutely be using segmentation to make the most of your margins. Excel isn’t practical for managing that volume of data—certainly not at the granular level.

Price segmentation groups products together by shared aspects such as technical attributes or product lifespan. High-level segmentation is based on availability—parts can be either commercial, meaning they’re widely available, or captive, meaning they’re proprietary. From there you can continue to differentiate at many levels, grouping parts into smaller buckets by factors such as cost, sourcing ease, criticality, and lifecycle stage, and set prices accordingly. For example, you can significantly increase the margin on a captive product near the end of its lifecycle. But for a commercial product that’s widely available and in an earlier lifecycle stage, you’ll need to price competitively to move your inventory.

Segmentation helps OEMs identify underpriced or overpriced items and manipulate the prices to tap into additional margin potential across your catalog. If you’re still using Excel spreadsheets, you are limiting that potential.

Start mining that gold – we’ll show you how

If you’re not using a sophisticated pricing solution that makes it easy to manage multiple pricing methods and multi-level segmentation, you might be sitting on a veritable gold mine of unrealized profit potential. That’s why we created the Profit Discovery Program. It’s a smart way to find out how much unrealized revenue you might have, and how to tap into it. There’s no cost and no obligation – all you have to do is share a sample of your data with us, and our team of experts does the rest. Fill out the form at the bottom of this page to get started.