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Implementing Market Based Pricing

Implementing Market Based Pricing

The concept of market-based pricing is not necessarily a new one, even though the traditional cost-plus pricing served as the standard pricing methodology for decades. The use of market-based pricing has been rather limited and fragmented at best. In fact roughly 90 percent of all OE and aftermarket parts manufacturers still use cost-plus pricing for their aftermarket service parts.

"83 percent of companies surveyed by Aberdeen reported effective parts pricing to be important or extremely important to the financial health of their companies, yet less than 20 percent of companies report feeling confident that their current pricing methodology is maximizing service parts revenue and gross profit."

Aberdeen Group © 2004

What inevitably happens with cost-plus pricing is certain parts are overpriced causing lost sales and customer dissatisfaction. A part might also be underpriced, which also leads to lost profit opportunities.

Implementing market-based pricing is not an easy task and requires top-down management buy-in. However, those who do utilize market-based pricing experience several significant benefits, including:

  • Increased top- and bottom-line performance
  • Greater customer satisfaction
  • Reduction in lost sales
  • Market share growth
  • Improved market share
  • Increased customer loyalty

Below are some very basic recommendations for implementing market-based pricing. InteliChek welcomes further discussion about these recommendations:

  1. Top-down Approval. Senior management must be aware not only of the benefits, but of the implications within their organization. Overall pricing strategy must now include factors such as competitive pricing. In addition, business analysts will require additional data from which to formulate pricing. It is highly likely that additions or adjustments will need to be made regarding technology: What impact will all this new data have and how will it integrate with current systems?
  2. Understand or define specific cost of goods sold. While this may seem like a given, some manufacturers with no pricing strategies whatsoever don’t know what their true manufacturing costs are.
  3. Acquire competitive pricing data. Hire an independent third-party company such as InteliChek to obtain competitive pricing data. Here it is essential that an apples-to-apples comparison is made. In addition, competitive studies should be made on a region-by-region (market-by-market) basis, however that region is to be defined. Based on our studies, pricing does indeed vary by region.
  4. Modify yoWur existing pricing. Make necessary adjustments to your pricing, factoring in premium parts, niche availability, how customers are purchasing and using your parts, and competitive pricing.
  5. Communicate new pricing throughout your organization. Inform all appropriate personnel what the new pricing policies are and be sure they understand what is taking place. It’s essential to have production planning involved, as there will likely be increases in demand for parts. Likewise, field sales personnel need to communicate the company’s new pricing strategy to their customers.
  6. Test and validate. Before diving right in, select a grouping of specific services and measure results based on gross dollars received, lost sales comparison, antidotal feedback from field sale force and solicit customer input. Testing and validating should be an ongoing process.

While the above may seem daunting, the long-term ROI will be such that it will be worth the effort. Additionally, moving to a market-based pricing strategy will take time to work its way through your organization. Be patient, but by all means ensure that proper performance measurement controls are in place.

"At the retail level, we moved to market-based pricing five years ago. In one example, our brake business doubled, not to mention the additional services sold while vehicles were in the shop. We realized it was a ‘must’ to know what the competitive pricing was. InteliChek helped us understand the competition in our market."

Service Manager
Import Dealership
Minneapolis, MN

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