3 Ways to Reduce Margin Erosion in a Declining Market

Around the world, businesses are facing an unforeseen and unprecedented economic downturn – COVID-19 has led to one of the fastest economic shocks in history. From every challenge, however, leaders can emerge stronger and more resilient than ever. And in a time of economic uncertainty, there are immediate measures businesses can take to reduce margin erosion.

For manufacturers and suppliers specifically, their customers tend to postpone their purchase decisions for finished goods or investments in new equipment in an economic decline. In some cases, customers will likely keep existing equipment in service for months or years longer than planned to avoid immediate, costly investments – ultimately resulting in additional maintenance and repairs. As a result, after-sales service becomes increasingly important to support a company’s overall profitability. More specifically, optimized service parts pricing ensures the end customer has a consistent experience, while the manufacturer or supplier simultaneously maximizes revenue and margins. 

Below are three ways to leverage a sophisticated service parts pricing solution to reduce margin erosion in a declining market:

  1. Segment the Business.

    When sales begin to decline in a downward market, most organizations slash prices in order to gain sales. However, if a competitor takes a similar approach, it can lead to an eroding market. Pricing decisions should be made with long-term vision in mind and the best way to do this is to segment the business and determine the optimal pricing strategy for each segment. Just as pricers would segment the business to determine where there is opportunity to increase pricing during a thriving market, teams should also implement this strategy to identify where they need to reduce pricing in a downward market.

  2. Adjust Quickly.

    Organizations must be able to respond quickly to a changing market. This not only includes understanding which parts need price adjustments and what those adjustments should be, but also being able to execute on these changes quickly and efficiently. Organizations that use off-line tools like Excel spreadsheets to manage service parts pricing will find themselves at a competitive disadvantage and negatively impacting the customer experience.

  3. Create a Pricing Strategy Map.

    A pricing strategy map that identifies segments, segment strategy and the associated pricing strategy must be developed. Aligning the proper pricing strategy to each segment is essential to prevent reducing prices on high-value, premium parts and captive parts, while remaining competitive in the market in other segments.

Manufacturers and suppliers around the world will need to make sure they have the proper technologies, resources and strategies in place that will maximize financial performance and the customer experience. These near- and long-term strategies should support increased financial and operational performance, exceptional customer experiences and competitive differentiation.

A cloud-based service parts pricing solution that leverages advanced algorithms to analyze real-time data from multiple sources like customers, competitors and legacy systems allows for optimal dynamic pricing – ensuring the end customer has a great experience, while the manufacturer or supplier simultaneously maximizes revenue and margins.

While this unexpected disruption in the market can be damaging to businesses, it’s also an opportunity to evaluate and optimize key operations within the service supply chain. The manufacturers and suppliers that successfully navigate this time will emerge more resilient and productive than ever.