Equipped with an optimized, AI-enabled aftermarket pricing strategy, OEMs will not only transform their profitability, but overcome complex challenges, align with market dynamics, and delight their customers. Those who make this a priority will checkmate the competition.
OEMs have no time to lose when it comes to getting their aftermarket pricing right. On the one hand, global supply chains have faced years of pressure caused by war and the COVID-19 pandemic. On the other, AI and Machine Learning are offering accelerated ways to adapt and optimize pricing strategies. These disruptive forces bring both pressing challenges and unignorable opportunities.
To successfully navigate the disruptive economy and emerge on top, it is critical to have a clear understanding of today’s pricing challenges and the strategic solutions available. From highlighting the limitations of traditional models to taking a closer look at technology integration, this article is a strategic snapshot of what your roadmap should look like.
Traditional parts pricing pitfalls
Multiple layers of complexity and innumerable variables have made it extremely difficult to determine the value of spare parts. This challenge has grown to the point where traditional cost-plus models are no longer sufficient, with customer expectations rising, third-party replicas widely available, and X-as-a-Service style agreements blurring the lines.
- Spare parts by their very nature are extremely complex. Component numbers are vast, their lifecycles vary, and demand is unpredictable. Trying to quantify the true value of a part with a cost-plus model in today’s world is a shot in the dark, and the target is moving. Pricing misalignment, profit leaks, and poor customer satisfaction scores are inevitable.
- The competitiveness among industry players has also added significantly to existing challenges, with OEMs and third-party providers trying to out-manoeuvre each other to secure service business deals. Understanding the strategies of your competitors and taking them into account is key to long-term revenue opportunities.
- Global pricing challenges like regional demand variations and shifting market conditions are constant variables that impact pricing strategies. Handling this amount of real-time information and making intelligent, automated decisions will be key.
- Limitations of the cost-plus model means that critical factors like market demand are overlooked, not to mention other competitive pricing dynamics. OEMs that are able to take these factors into account seamlessly will run rings around their competition in the aftermarket, driving significant profit margin gains.
- Currency fluctuations add yet another layer of complexity into the mix, hampering revenue generation and overall market position. AI-enabled solutions offer the means to monitor these conditions continuously, allowing data-driven adjustments to be made to your pricing strategy.
The power of a value-based approach
While tangible goods come with quantifiable production costs, functionality, and quality, intangible services introduce different challenges when creating an aftermarket pricing strategy. A prime example of an intangible service is predictive maintenance, as it requires continuous adaptation and upgrades.
Because the value of intangible offerings is so much harder to determine, an in-depth understanding of customer expectations and market dynamics is required to accurately price them. Global service network management is required to assess these market dynamics, but also to keep track of various regulatory frameworks. OEMs also need to double down on trust and transparency to maintain long-term relationships based on intangible services.
Value-based pricing has a crucial role to play here, as it is a customer-centric model that aligns pricing intelligently with the perceived value of an offering. By adopting a value-based strategy, OEMs are empowered when optimizing their pricing decisions.
Cost-based and competitor-based pricing models are simply not guided by the customer value, which is vital for aftermarket success. Spare parts and service contract pricing is enhanced significantly when using a value-based method, here are the benefits:
- Customer confidence: Customers are reassured that they are getting the most value for their money
- Perceived quality: Setting premium prices that are aligned with perceived value enhances the perceived quality of the offering
- Improved profit margins: OEMs can justify higher prices and improve profit margins based on customer benefits
- Ongoing innovation: Manufacturers must innovate and improve their products and services to increase their perceived value
The aftermarket pricing mix toolkit
Getting this mix right enables an OEM to maintain levels of customer satisfaction and product performance far beyond the initial sale – aftermarket success is the result.
This involves offering customers spare parts, maintenance contracts, and upgrades, as well as any other services that increase the likelihood of them returning. Your ability to dynamically price this mix of tangible and intangible offerings will determine the profit margin gains you make.
The complexity of the equipment should be considered when redefining aftermarket pricing, as should the length of product lifecycles and overall reliability. Meeting today’s tightening regulatory and compliance safety standards should also be factored into aftermarket pricing. Get our white paper, Checkmate: Winning Strategies for the Ultimate Aftermarket Pricing Mix to learn more.