OEM After-Market vs. General Retail: Yes, You Need a Different Pricing Approach
Commonly, I am asked if there is a difference between the best approach to the pricing of general retail items and the best approach used for OEM after-market items such as spare parts and services. Ultimately, no matter where in the lifecycle of a sale, pricing of both is designed to maximize profits and shareholder value while considering consumer and market demand optimized across multiple markets and product segments. In some sense, that is where the similarities end.
General retail pricing and after-market pricing are inherently different and leveraging that knowledge for greater profits is a valuable differentiator to your business. Indeed, it is critical to understand the different pricing strategies, the pros and cons of each, and buyer intent—what drives someone to purchase and how that impacts pricing methodology.
Different Business Objectives Drive Different Pricing Strategies
When pricing strategically for a general transactional retail situation, the goal is usually to encourage a high sales volume at the best margin the market will bear. Pricing for transactional retail typically involves a simplistic cost-plus pricing model strategy. With a one-time, sales-driven approach, the pricing strategy is less about “how do I achieve the right price regardless of sales volume” to “how do I actively encourage higher sales volume with the price I set?” Retail pricing is primarily about encouraging consumers to buy an item from you, not your competitor.
For OEMs, after-market pricing of spare parts takes an entirely different and necessarily more nuanced approach. Not realizing the difference between the approaches needed for after-market is to leave revenue and more on the table. And it’s not that OEMs or their dealers care any less about driving higher sales volume – that’s an integral part of any successful service business. Instead, the critical consideration for pricing in the after-market segment is that spare parts sales volumes align with product lifecycle opportunities and meet necessary parts needs. This puts advanced pricing strategies such as value-based pricing at the center of your optimal approach, whenever possible.
Product Lifecycle Alignment Creates Unique Opportunities
As I shared in a recent post on where to look for hidden profits in your spare parts, OEMs have a significant pricing advantage in two stages of the after-market product lifecycle, in particular: brand new and somewhat old parts. When products are brand new, OEMs can lean into captive parts pricing because no third-party parts providers exist to challenge that higher price. OEMs can take advantage of this by ensuring prices capture higher margins while competition is non-existent.
Similarly, older parts can be a source of hidden profits. When for example, older equipment needs parts, those parts may be challenging to find because the third-party parts manufacturers have stopped making them, or those older parts are not readily kept in standard inventory. Why are third-party parts manufacturers not interested in carrying the parts? Because of a “sales volume first” mindset; it is simply not profitable for third parties to continue manufacturing or storing these parts because chances are the total sales revenue doesn’t warrant the part’s coverage. However, just looking at dollars coming in from sales revenue may not tell you the whole story about how your products are genuinely performing in the market. For the OEM, it’s likely in your best interest to continue providing parts for older equipment, as your margins on the older part can be at a premium as competition is low.
A Different Approach to Promotions
Another big difference in pricing between general retail and after-market spare parts is around promotion strategy. For third-party parts manufacturers and point-of-sale retailers, running as an example, a “buy three, get one free!” type promotion might make perfect sense. Even if the promotion is a loss leader, it will encourage buyer traffic to come through the door and increase total sales volume on the books.
However, this strategy doesn’t optimally apply to OEM spare parts business. Loss leader promotions such as the above example in an OEM’s case will unnecessarily erode margins on the parts customers must buy. For these customers, having an operational piece of equipment is a need-to-have, not a nice-to-have. We are talking about situations when the equipment is down; the bottom-line impact rises exponentially. A customer is paying for a machine that isn’t running is missing out on revenue. As a result, the cost of not having a part readily available needs to be reflected in the price of parts – something on which retail pricing tools and strategies do not focus. OEMs can take advantage of much lower price sensitivity in this situation. Promotion is unnecessary in this scenario; doing one can miss a vast source of good margin revenue. Having a tool to model these scenarios is essential to running a successful after-market business.
So, how do you use your newly found knowledge to improve after-market business results at your organization?
- Get straight on your spare parts pricing strategy. As we’ve explored in posts on better segmentation and advanced spare parts pricing tactics, there’s a tremendous opportunity for OEMs to increase revenue and margins on spare parts. But you have to do your homework to ensure you understand the differences and intricacies of after-market spare part pricing.
- Leverage all the data at your disposal to capture more value. From competitive data to spare part inventory management data, you need to put all your information to work for you. The goal of your analysis is to find that sweet spot of maximum margin and sales volume. Not using this data to optimize your pricing is simply leaving money on the table.
- Invest in a modern, scalable, cloud-based pricing solution built for the after-market. As we shared in “why you should use spare parts price optimization software,” the best way to make your data actionable and profitable is to use a sophisticated pricing solution specifically built to address after-market pricing concerns. Solutions for after-market sales do many things, like make sense of the insane amount of pricing data in ways retail pricing systems cannot. Leading-edge solutions also use advanced technologies like artificial intelligence (AI) and machine learning (ML) based on after-market models to suggest the best price based on intelligent segmentation and several other data sources relevant to the after-market business.
Want to explore the difference optimal spare parts pricing can make for your after-market spare parts business? Head to our Profit Discovery Program page to find out how to get your no-cost, no-obligation assessment.