Adding Value To Service Parts Pricing

22 November 2020

Aftermarket Service Parts

For service parts companies, the pricing of parts—whether you’re working with quantities in the thousands or hundreds of thousands—is a complicated affair, and not one taken lightly.

Now, with the increased burden of COVID-19, service parts companies must face the emerging challenges of disruptions to supply and demand, increased government regulation and evolving customer behaviour.

These dramatic changes to the status quo are forcing industry members to rethink their go-to-market strategy. In such a time, it is important to seek new methods to optimize and maximize, reconfiguring a challenging time into one of evolution and growth.

Critical Issues

New equipment purchases cratering due to drop in disposable income
Reduction in commuting has resulted in less mileage, wear, and collisions
Vehicle operators delaying non-critical repairs / scheduled maintenance
Service locations shutting down, leading to an increase in the share of DIY repairs
Customers migrating to E-tailers to procure parts
Individuals working from home causing more wear on home appliances
Reduction in non-critical repairs that keep service people out of homes

Driving Results with Pricing

Service parts firms face important decisions to ensure their success in the next 12-24 months. A key growth lever, which is often overlooked, is the strategic management of price.

Aftermarket service parts conventional complexities:

Thousands of SKUs to be priced at different levels in the supply chain: Aftermarket parts portfolios can include 1000s of parts that perform differently. To manage these large portfolios, service parts companies need to categorize and create groups of parts that can leverage different pricing strategies and maximize their customer’s willingness to pay.
Identifying relevant benchmark competition: It can be challenging to identify who your competitors are across different channels and product lines. Competition exists from Original Equipment Manufacturers (OEM), aftermarket suppliers (domestic and generic imports), and private label brands. It is challenging even to determine which competitive brands to monitor across your portfolio.
Translating a pricing strategy to end-user pricing: Multiple levels often exist between manufacturers and the end-user; distributor and retailer programs also have a greater impact on the installer/end-user price. As a result, even though end-users drive demand for aftermarket products, the manufacturer pricing strategy is usually focused further up the supply chain. It can also be challenging to calculate elasticity due to pricing actions being obscured by the multiple levels between supplier and end-user.
Identifying end-user prices across multiple channels: Service parts companies generally have a hard time identifying the actual end-user purchase price. While retail prices are usually most readily available, the majority of service part purchases are driven through repair channels with limited pricing visibility.

Identifying the size of the market: Service parts companies usually have high-level category estimates for the size of market and market share but tend to find it difficult to estimate these metrics on the level of product category or specific parts. This is because part failure rates differ dramatically based on the install machine as well as the frequency of machine operation.

As a result, service parts companies tend to have trouble identifying what the actual size of their market is and how their parts perform relative to the rest of the market. Without this view and/or price elasticity, it can be difficult to gauge performance.

Traditional Pricing Approaches

Due to these inherent complexities, companies often resort to two common pricing strategies:

1. Cost-Plus Pricing

Flat margin across groups of parts.

2. Competition-Based Pricing

Competitive price plus or minus a certain percentage.

Moving Beyond Cost and Creating a Value-Based Pricing Strategy

A value-based pricing strategy moves pricing from a purely insular view to a holistic, balanced framework that accounts for competition, market trends/opportunity, margin, customer value perception and willingness to pay. Some key factors to consider when implementing a value-based pricing strategy include:

Criticality: It is necessary to analyze the importance/criticality of the service part in the operation of the machinery in question. Customers are typically willing to pay higher prices for better quality products due to the fact that product failure can lead to significant downtime or high labour costs during a repair.
Product Features: Customers are willing to pay for products that provide added features versus the competition. Service companies can identify those features through sentiment tracking, customer surveys, sales interviews, etc. Creating clear feature-based pricing guidelines will ensure that value is not left on the table.
Competition: The level of competition can vary for different products. Products can range from captive parts with no competition to commodities with dozens of competitors. Pricing strategies need to be executed with a close eye on the relevant competitive set to ensure that opportunities are not created for your competition to capture market share.
Product Lifecycle & Obsolescence: Parts companies need to implement different pricing strategies at different stages in the product lifecycle. The market size, competitive intensity and sales volume for each product evolves as it proceeds along its lifecycle.

Sample Product Lifecycle Pricing Strategy

Market Size / Market Share: A clear view of SKU-level market size is imperative when driving pricing. Your company can leverage different pricing strategies to promote volume growth or drive margin based on your product market share.

Sample Market Share Strategy

Customer: Finally, it is essential to understand what your end-users have and what they value. Different end-user segments can constitute wildly different value requirements and price sensitivities. A one-size-fits-all pricing approach across your entire customer base would lead to diminished results vs multiple price points that effectively target each customer segment.

As service parts companies look to position themselves for growth, post-pandemic pricing is an essential lever.

Can you say with confidence that your service parts pricing strategy is not leaving money on the table?