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Spare Parts: The Hidden Profit Center

Kalle Aerikkala< Kalle Aerikkala March 11, 2019

Your spare parts business can deliver great profitability with margins higher than even a typical product line. This is especially true in an organization that deals in very cyclical markets with supply constraints and variation in demand. But realizing the greatest profit potential from your spare parts business comes only on the other side of a few strategic decisions.

Spare Parts Perception and Viability

The first and most important consideration is the overall perception of spare parts within your organization. How do you categorize this type of business compared to your other product lines? For most, spare parts prioritization is usually one of three possible scenarios:

  1. It’s not a real business: the spare parts business is a necessary evil done only to ensure equipment sales.
  2. It’s a separate business: the spare parts business is important to the business but comparatively uninteresting and therefore prioritized little.
  3. It’s part of our solution: the spare parts business is embedded within your service solutions, creating impact on both company focus and profit.

None of the above choices are necessarily correct (or incorrect!), but it’s important to identify which best fits your organization today in order to make strategic improvements in the future.

How Will We Make Progress?

Once you’ve made an intentional decision about how to prioritize your spare parts business and maximize its margin, there are more decisions to be made on how to link it to your wider business strategy and maturity.

  1. How can we secure the correct investment to develop our spare parts business?
  2. How do we ensure we have the best possible people to manage the business?
  3. How will we optimize spare parts profits as part of our total portfolio?

With each of those questions answered, it’s important you address your company’s response to challenges that are common across virtually every spare parts business. The most prevalent pain points include having a good mix of both slow- and fast-moving products and effectively managing every SKU.

Sales Team Tools

Even your very best sales person cannot be an expert on every product you inventory. To manage diverse portfolios, give your sales team with tools they can use to move spare parts profitably without requiring they know every latest nuance. The tools also provide invaluable insight into revenue and profit.

Start with efficient management of your price lists and set policies for deal negotiation. Pricing is never a one-time decision – rather, it’s impacted by multiple variables that change over time. Competitive price points, willingness to pay and regional differences will impact your price points and you need to be able to account for all of these changing circumstances – and more – in real-time. Dynamic pricing tools will help you set the right price, at the right time, for the right customer – taking into consideration a wide variety of changing factors. 

You also need a fast, accurate quoting process. Speed is money and customers expect immediate answers to their questions of ‘how much?’ Your quote can’t take days and days to arrive, even if it is a complex order that requires several rounds of internal approvals. Answers are needed yesterday in many cases and there are valuable Configure Price Quote (CPQ) tools on the market today that can help you quickly generate an accurate and profitable quote.

Finally, analyze your deals to identify leakage from unnecessary discounting, unwanted price variation, unrecovered cost-to-serve and more. Quickly find products with higher/lower margins and adjust as necessary.

Define your spare parts business, set goals and intentionally navigate your targets. Then, watch your profit grow.

If you’re considering adopting a pricing optimization solution and want to better understand key criteria wen evaluating potential vendors, download the 2019 IDC Price Optimization Vendor Assessment.