SMART Parts Pricing® Spare parts pricing as a profit lever

In recent years, spare parts pricing has been recognized and professionalized as an important profit lever across numerous industries. However, price pressures have increased significantly worldwide in the recent past. The increasing intensification of competition, the growing transparency of market prices and the professionalization of purchasing make pricing a complex and multi-layered management task in the digital age.

Manufacturing technology companies generate a turnover of approx. 10 percent with spare parts, but the profit share is more than 30 percent. In plant construction and mechanical engineering, new business often only serves the purpose of bringing the largest possible installed base onto the market. At the same time, high margins are subsequently achieved in service. Against the backdrop of the enormous potential for profit, approaching the pricing of spare parts systematically and professionally becomes crucial.

Based on our comprehensive project experience in the field of spare parts pricing, we are familiar with the main challenges:

  • Missing launch point for price formation due to an incomplete and unreliable data basis (material master data, cost basis, etc.)
  • Purely cost-oriented pricing with undifferentiated mark-up factors according to gut feelings, instead of alignment with willingness to pay and market structure
  • Large share of unused profit potential due to numerous sleeper parts no longer in demand and flop parts in demand but not sold
  • Non-reflective pricing architecture across product groups, channels, regions and customer segments and lack of consistency in pricing message vis-a-vis global key accounts
  • Undifferentiated, annual price adjustments via fixed inflation surcharges according to a principle of indiscriminate and all-round distribution
  • Excessive customer discounts without a clear reference to performance-related criteria
  • Lack of transparency and control options as well as high manual effort in price maintenance due to unsuitable systems

 

Professionalization in spare parts pricing

 

In recent years, professional pricing software and tools have played a central role in the further development of the spare parts pricing methodology. Using sophisticated algorithms, we can ensure maximum market intelligence in spare parts prices using large amounts of data.

The increasing comparability resulting from digitization requires marketable prices and price fairness for parts with high competitive pressure. Concerning know-how and monopoly parts, the primary challenge is to siphon off customers’ willingness to pay in as differentiated and comprehensive a manner as possible.

Spare parts pricing: degrees of professionalization over time
Professionalization of spare parts pricing over time

As part of our SMART Parts Pricing® approach, it is crucial to optimize all adjustable parameters of a price waterfall. In addition to the global list price, we consider a clear differentiation in the international price structure as well as a performance-related discount logic for customer-oriented final prices. All price parameters are fine-tuned on the basis of a comprehensive simulation model with which the effects on the relevant target values can be forecast. The focus is not on the individual spare part, but on the overall price structure within associated part families. That way, we can ensure a price architecture that is as consistent as possible.

Price architecture: development along a price waterfall
Price architecture development along a price waterfall

Measurable increase in the economic success of your company.

 

By systematically optimizing spare parts prices, EBIT increases of 3-5 percentage points and significant volume effects can be achieved. Even with low sales in the spare parts business, an optimization project usually pays for itself after just a few months. On average, the spare parts business accounts for about one third of the total margin in the industrial goods sector. This makes systematic and market-oriented spare parts pricing one of the most powerful profit levers available.

If you would like to learn more about how to exploit your own company’s full potential regarding spare parts pricing, contact our pricing expert Daniel Lindner for a talk on the topic.
Principal

Daniel Lindner

daniel.lindner@homburg-partner.com
Tel.: +49 621 1582-134