Originally Posted: July 24, 2018
Last Updated: April 7, 2023
The aftermarket industry is becoming increasingly important in today’s economy as more manufacturers look to boost their revenue and profits through spare parts and services. From a growing list of parts to price – which now last longer and require extended life cycle management – to increasing competition in an ever-changing regulatory environment that drives substitution, managing profitability in the aftermarket industry is no easy task.
Introduction to Aftermarket and Spare Parts Industry
The aftermarket and spare parts industry provides necessary components for repairing and maintaining equipment and machinery. It includes products like replacement parts, accessories, consumables, and services. With the increasing complexity and lifespan of equipment and machinery, the aftermarket industry has become more critical than ever before.
If your business is operating in the aftermarket and spare parts industry, efficient management of discount codes and optimization of local pricing is crucial. The process involves setting deal and net prices, and ensuring pricing is harmonized across regions and countries. This level of precision is particularly essential for those operating in the industrial aftermarket and spare parts sector.
The aftermarket industry is no stranger to pricing challenges. One of the most common is managing complex and extensive product portfolios with multiple pricing variables. Some others include:
- Limited visibility into competitors’ pricing strategies
- Difficulty in accurately forecasting demand for specific parts
- Changes in supply chain, including tariffs, transportation, and raw material costs
- Navigating price pressure from customers and the market
- Managing price consistency across different regions and markets
- Difficulty in optimizing pricing for different channels and customer segments
- Balancing short-term revenue objectives with long-term profitability goals.
The Importance of Pricing Strategy for Spare Parts
The spare parts industry is highly competitive and businesses must have a well-planned pricing strategy to remain profitable. A sound pricing strategy can help you maximize profits, increase market share, and improve customer loyalty.
However, it can be challenging to set the right price for spare parts due to various factors such as the cost of production, competition, and customer demand. Therefore, you need to define your pricing strategy and invest in the right tools and technologies to optimize your pricing decisions.
Understanding the Different Pricing Models
There are a variety of part pricing models you could implement to make margin improvements. Price optimization is one that has made a significant difference for some spare parts distributors but understanding it and ensuring it works well for you can be a challenge.
Price optimization has been around for over 10 years, yet while certainly a trend, there remains confusion over how it works. The rise of AI hasn’t helped. While sticking an ‘AI’ label on a pricing algorithm – or even naming it ‘Susan’ – might seem like a good idea, it doesn’t improve the pricing accuracy and it doesn’t broaden its applicability. It does, however, provide a new excuse to avoid explaining how it works. It also side-steps the opportunity to give pricing managers the means to control it.
Types of Pricing Models for Spare Parts
So the question becomes, what is the best spare parts pricing strategy for businesses and can price optimization really work well?
To make this determination, you need to look at the different pricing methods available, and understand their relative strengths and weaknesses to your business. At the highest level, the various pricing concepts can be grouped and ordered as follows:
There are many other types of pricing strategies, but these are some of the most common. If appropriate, moving down the list may bring your pricing ever closer to your customers’ willingness to pay, and capture more margin. Staying near the top of the list gives you the simplest control of pricing, the easier justification in front of customers, and the broadest applicability.
Cost-Plus Pricing for Spare Parts
Cost Plus pricing works in environments where a purchase or replacement cost can be easily found. It can be calculated quickly and efficiently across huge product portfolios. Sales teams find it easy to explain to customers that the price is relative to your costs. Controlling prices with cost-plus is also easier. When a business has an overall margin objective, and you manage prices by setting margins (or mark-ups), it’s easy to explain how the prices will support the overall goal.
Market Driven Pricing for Spare Parts
Competitive or market-driven pricing is another commonly used pricing strategy for spare parts. Instead of focusing solely on costs, this approach takes into account what competitors are charging for similar products. By monitoring the competition and adjusting prices accordingly, businesses can maintain a competitive edge and attract customers who may otherwise go elsewhere for better prices. With this pricing strategy, businesses can adapt to changes in the market and stay ahead of the competition, ultimately leading to increased sales and profitability.
Value-Based Pricing for Spare Parts
Value-Based pricing models range in complexity and sophistication and I will dive into this in further detail in an upcoming post. However, at the most complex level of this group, we see price fully optimized on customer buying behavior and product attributes. This approach often also generates derived attributes but they are evaluated and selected based on an individual correlation with price performance and then organized into a quantitative segmentation. Rules may be used for refinement but the basis for the pricing guidance is the set of historical transactions for each segment.
Factors to Consider When Choosing a Pricing Model For Spare Parts
When choosing a pricing model for your spare parts, it’s important to consider several factors. Here are some things to keep in mind:
- Market competition: Look at your competitors’ pricing models to see what works and what doesn’t. You don’t want to price yourself out of the market or leave money on the table.
- Cost structure: Take a hard look at your cost structure to determine the minimum price you can charge for your spare parts while still making a profit.
- Customer value: Understand what your customers value most about your spare parts and what they’re willing to pay for it. Use this information to set prices that reflect the value you offer.
- Sales channel: Consider the sales channel through which you sell your spare parts, whether it be through distributors, online marketplaces, or direct sales. Each channel may require a different pricing strategy.
- Product lifecycle: Determine where your spare parts are in their lifecycle and how much demand there is for them. Pricing for products in the introduction or decline phase may differ from those in the maturity phase.
Best Practices for Implementing a Pricing Strategy for Spare Parts
Conduct Market Research
The first step in implementing a successful pricing strategy for spare parts is conducting market research. This includes understanding your competitors, their pricing strategies, and how you can differentiate your product offering. Additionally, analyzing your customer base and their willingness to pay for your products can help inform your pricing strategy.
Choose the Right Pricing Model
Selecting the appropriate pricing model is key to successfully pricing spare parts. Consider factors such as the nature of the product, the customer base, and the competitive landscape when choosing your pricing model.
Utilize Data and Analytics
Data and analytics can provide valuable insights to inform your pricing strategy. This includes analyzing sales data, pricing trends, and customer behavior. Utilizing a price management solution like Vendavo Pricepoint can help automate this process and provide real-time insights into pricing decisions.
Continuously Monitor and Adjust
Finally, it is important to continuously monitor and adjust your pricing strategy to ensure its effectiveness. This includes regularly evaluating pricing data, conducting competitive analysis, and staying up-to-date with industry trends. Continuously monitoring and adjusting your pricing strategy can help you remain competitive in the marketplace and maximize profitability.
Full parts pricing optimisation doesn’t need to be ‘black box’, it just needs to leverage historical data for a given selling scenario, and use that to generate target prices. Models either implicitly or explicitly measure willingness to pay (elasticity), but the concept can be open, can be understood and can be controlled if you demand it. Fortunately, some AI price solutions have evolved past the ‘black box’ stage and can be tailored to precise business needs by combining the power of data with on-the-ground, human expertise.
When developing a strategy, be prepared to accept that while one pricing model may be great for some parts of your portfolio, it may not be appropriate for the entire business, and that a simple approach is sometimes the best. The best approach is to arm yourself with a good understanding of all the different models, how they might work in your company, and where they would be applicable. This will allow you to identify if improvements can be made, and what will drive the biggest realistic return. Also be sure to lean on the right technology to help you grow. Choose Vendavo’s intelligent pricing solutions to unlock profitability with your spare parts pricing strategy.