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Spare Parts
Pricing

Just two steps to a far more profitable spare-parts pricing concept – and after-sales service and spare parts become sales and profit generators! But: Companies still put 80% of their energy into abstract individual pricing and not into a well-thought-out pricing system, nor do they place an emphasis on actually getting the prices they set on the market. And they usually only focus on new products; almost never on individual replacement parts. A conscious decision against sales and profit margins? Because that is de facto what a lack of a pricing strategy amounts to! Many OEMs today set their prices more or less by gut feeling. Read here how you can do it better, and make your spare-parts business profitable with a clever pricing concept!

More sales and higher profits? Nothing could be easier than that, right? Just raise your prices?! But pricing is a complex field, in which many enterprises don't exploit their full potential – not only in after-sales service and spare parts. For one thing, when it comes to spare parts, we are often speaking of an unbelievably large number of items, because many OEMs have several hundred thousand spare parts on offer in their after sales and customer care! With a smart overall concept you could give each one of these replacement parts their own price, e.g. based on criticality and numerous other criteria. But the reality of it doesn't look like that: as a rule, spare parts prices are calculated roughly at cost-plus (in the best case!), or simply by rule of thumb for all parts – many of them even below their own price of acquisition!

What is more, companies still put about 80% of their energy into abstract individual pricing and not into a well-thought-out pricing system, nor do they place an emphasis on asserting the prices they set on the market. And they usually only focus on new products; almost never on individual replacement parts. A conscious decision against sales and profit margins? Because that is de facto what a lack of a conceptual pricing strategy amounts to! Many OEMs today set their prices more or less by the seat of their pants – no wonder, with hundreds of thousands of spare parts to consider!

Barkawi's proprietary "Pricing Decision Platform" is a software tool that enables you to make good decisions despite a complex data situation: it takes into account regional prices, centralized prices, freight costs, discounts, bonuses, criticality of the parts, competitive factors and much more besides. Our tool contains the price master data you require, simulates price changes, and optimizes your pricing into a perfect overall pricing concept! Whether you are in the energy sector, the agricultural machinery business, the mobile telephony, construction machine or plant construction industry, you can improve your margins by double-digit percentages with our solution. After-sales service and spare parts as sales and profit generators – that is our goal!

But how do you go about it? What do you have to consider, and what mistakes have to be avoided? Which mathematical models can be used? How does a coherent overall concept sustainably help your company be successful, in just two steps?

In just two steps to a strong pricing concept:

1/2Transparency by means of parts segmentation and portfolio structuring

The key to getting a grip on the complexity of pricing services/spare parts is segmenting the parts and structuring the part portfolio. The decisive success factors here are dividing up the replacement parts as to their competition on the market, and thinking in terms of value drivers. Is the spare part a standard part for which the market has other providers? Are the prices offered by the competition freely available and can they be easily compared? Or is the part an OEM-specific part designed specifically for the individual customer, perhaps even with industrial property rights attached to it? Are the parts "captive parts", standardized parts or "competitive parts"? Why is this distinction important? Quite simple: Captive parts play a special role because they are quasi-monopolistic parts with regard to which the OEM typically has a strong market position and can therefore dictate terms and the price!

A typical example of a value driver is the "criticality" of the part. How critical is it for the customer? Does a defect in the part lead to machine downtimes, with possible lost sales or perhaps even penalty payments? Criteria like these drive the margin potential and are decisive when selecting the most suitable pricing approach!

Our Pricing Decision Tool leads to the best possible decision, because it considers even the most complex variables and calculates prices expertly!

2/2Clever use of margin curves and mathematical pricing rules

The standard practice is to charge the same margin for all parts. But in some cases, charging too much for parts that are subject to tough competition can result in a loss of market share! On the other hand, not exploiting the full price potential of captive parts is a wasted opportunity. Because with captive parts the OEM has a position of power, and special rights, intellectual property rights or unique technical capabilities give it a virtual monopoly! Not exploiting these things is tantamount to willingly giving away sales, profits and earnings!

A mathematical consideration of the parts, their criticality, the customers' price sensitivity, etc. maps these relationships as mathematical variables and in a mathematical curve: for example, customers tend to be less price sensitive and more willing to pay proportionately higher prices for low-cost parts than for high-quality parts or key components. The more expensive a part is, the more the customers start thinking about its price, and comparing it with the residual value of the apparatus as a whole. They research prices available on the market and look for alternatives. So segment-specific mathematical margin curves with falling margins the more the value increases are a good basic rule.

Various subsequent cost effects typically also substantially reduce the margin even more, and products with multiple special performances quickly come up against the limits of their profitability. Having a set of rules for controlling and anticipating these effects is the basis of a modern, comprehensive pricing project – price is far more than simply cost-plus!

All these criteria are taken into account by the Barkawi Pricing Decision Tool, with algorithms and mathematical decision-making rules being considered, calculated, simulated and optimized within a price-optimized model!

Pricing-Booklet
download

But what does a good spare-parts pricing concept have to have? How do you go about designing one? What do you have to consider? You will find the answers to these questions, numerous examples from business practice and suggestions for how to proceed in our latest booklet "Pricing as an Overall Concept":

 

Service Parts Pricing 4.0

So that reality doesn't catch up with your pricing and price assertion on the market!

If you were to ask a business person if they would willingly forego sales and profit margin, they would most certainly frown at you and shake their head. But that is in principle exactly what you are doing if you don't have a pricing strategy! Many OEMs today do their pricing more or less by the seat of their pants. Deliberate differentiation in setting and getting their prices is the first step toward a strong overall concept, at the end of which stand more sales and higher profit margins.

But how do you go about it? What do you have to consider, and what mistakes have to be avoided? Which mathematical models can be used?

Read here how a coherent overall concept can sustainably help your company be successful!

> To the booklet

Our Experts for you
Pricing Championship

Get in touch:

Andreas Baader
Managing Partner
moc.iwakrab@redaab.saerdna
Tel. +49 89 - 748926 - 712

Oliver Bendig
Partner
moc.iwakrab@gidneb.revilo
Tel. +49 89 - 748926 - 813

Barkawi Management Consultants
Büro München
infonotvisible@barkawinotvisible.com
Tel. +49 89 - 749826 - 0