Around the globe, customers are postponing purchase decisions for finished goods, meaning they will be keeping existing products and equipment in service for months (or even years) longer than planned. This will lead to additional maintenance and repair costs – putting after-sales service in the spotlight.
It’s common to slash spare parts prices as a way to boost revenue in the near-term. While this might yield a short-term boost, competitors can quickly follow suit – leading to an eroding overall market.
This begs the question: What spare parts pricing strategies can executives employ that drive much-needed revenue, while positioning their organizations for long-term success?
Recently I have had several conversations with Kevin Mitchell, President of Professional Pricing Society (PPS), about just this. Below are some highlights from our discussions:
Q: In more predictable times, what value does optimized pricing provide to manufacturers and suppliers? How does this value change or increase during today’s more uncertain climate?
A: Optimized pricing can identify cases where there is a disconnect between the products and services a company provides, and the revenue that is derived from them. It can protect a company’s sales, margins and profitability by highlighting situations where the value a company provides is not aligned with the compensation a company receives.
Many organizations think of optimized pricing as the ability to increase prices over time. This is typically based on trying to understand a customer’s willingness to pay or using advanced part or product segmentation with alignment to the right price strategy. Optimized pricing can also be effective in a declining market to understand the areas where product bundles or other ways of providing additional value can prevent blanket, ‘across the board’ reductions.
Q: More specifically, what value can pricing technology provide?
A: Pricing technology can provide valuable guidelines for sales, marketing, product management and customer-facing departments. Technology can streamline processes and reduce complexity, especially when there is a high volume of transactions. It allows teams to focus on strategic initiatives, ultimately making organizations more knowledgeable, efficient and effective.
Furthermore, it can remove inherent biases and gut reactions, which all too often are not well thought out and can be dangerous. It’s important to point out that “optimization” via sophisticated pricing technology is a structured analysis of historical data and decisions made with current market data and corporate strategies layered on top.
Q: Are there any lessons learned from the 2007-08 financial crisis that we can apply today? Or things we should avoid?
A: During the last crisis, companies cut costs to the point that their offerings were negatively affected. We know that costs can only be cut to a certain extent – there is a “hard floor” limit.
In the last financial crisis, many companies reduced their price offerings, thinking this would lead to higher sales volume. Unfortunately, nothing happens in a vacuum and competitors simply matched price cuts. This led to decreases in price, margins, revenue and profitability.
As always, manufacturers and suppliers should avoid price gouging on spare parts and should always consider market and competitor responses when changing prices.
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