Price is a key success factor in service, particularly in after-sales, but the best pricing approach uses a value-based pricing methodology that considers the unique aspects of service parts.
A McKinsey study recently recommended expanding OEM after-sales lifetime value by re-pricing spare parts more dynamically. With this data-based approach, OEMs can achieve 3-10 percent EBIT margin improvements from better pricing for the long tail of a service parts assortment – supported by an incredible 80 percent of service champions that employ value-based pricing models.
But, to understand value-based pricing for service parts, it’s crucial to understand the differences in product lifecycles between service parts and finished goods. A typical finished goods product lifecycle and the associated pricing approaches look like this:
- Product Introduction. Price skimming with high price or market penetration with a low price. Channel incentives and other marketing support this to improve market share.
- Growth. Differentiated pricing, and premium pricing based on product competitive advantages.
- Maturity. Reduced pricing to match competitors who have entered market and decreased differentiation.
- Decline. Market saturation, slowing sales, and a focus on profitable items in a portfolio.
- End of lifecycle. Harvesting for continued revenue, with consideration of discontinuing and burning down via markdowns.
Service parts are different than finished goods for a few key reasons: Service parts must be available to continue supporting finished goods, even after the finished goods are discontinued. And while there’s incentive to extend part sales beyond finished goods end of life, service parts frequently have high margins and large revenue contribution from the parts, repair and support services. Some parts are unique to the OEM or have limited suppliers, but are required for keeping equipment up and running.
Service parts pricing through the part lifecycle is subsequently unique as well. Broad part assortments mean attributes driving value differences vary greatly by part category. Parts are replaced with substitutable parts over time and reused for different finished goods platforms. Pricing of individual components must be considered when used in complex replacement parts with complex Bills of Material (BOM), or as part of a kit.
A typical service part lifecycle and the associated pricing approaches look like this:
- New Product Introduction. Intelligent assignment of the part to a value-based pricing segment using attribute matching into a flexible product segmentation hierarchy.
- Growth. Value-based pricing to maintain brand loyalty as a part comes out of warranty.
- Steady state. Competitors identify and begin competing on simple, consumable parts. Value-based pricing must include competitive positioning and analytics to measure increasing price sensitivity.
- Decline. Replacement of a supported product is considered, so prices must be constrained on complex, high-priced repair components in relation to finished goods. More replace, refurbish, and repair options are available, so customer segmentation must drive price tiering between quality tiers to refurbish part options.
- End of lifecycle. Priced to deplete superseded part inventories, with premium pricing on unique, critical replacement parts.
Service is an increasingly important part of all manufacturer’s financial success, and service part pricing is a key part of achieving these margin and revenue improvement goals. The complexity of service parts, and the many locations, channels and distribution levels at which they’re priced requires unique service part pricing approaches. The good news? Many have been implemented successfully across different manufacturing industry verticals, and value-based pricing is ranking supreme.