The concept of market-based pricing is not necessarily a new concept, even though the traditional cost plus pricing was the standard pricing methodology for decades. Market-based pricings’ use has been rather limited and fragmented at best. In fact roughly 90% of all OE and aftermarket parts manufacturers cling to cost plus pricing for their aftermarket service parts.
"83% of companies surveyed by Aberdeen reported effective parts pricing is important or extremely important to the financial health of their companies, but less than 20% of companies are confident 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, thereby causing lost sales and customer dissatisfaction. The part might also be underpriced, leading to lost profit opportunities.
Implementing market-based pricing is not an easy task and requires top-down management buy in. However, those that do utilize market-based pricing experience several significant benefits, including:
Increased top and bottom line performance;
Greater customer satisfaction;
Reduced lost sales;
Market share growth;
Improved market share; and
Increased customer loyalty
Given the above, below are some very basic recommendations for implementing market-based pricing. InteliChek™ welcomes further discussions about these recommendations.
1. Top-down Approval…Senior management must be aware of not only the benefits, but the implications within their organization. Overall pricing strategy must now include factors such as competitive pricing. In addition, pricing, or business analysts will require additional data from which to formulate their pricing. It is highly likely 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 manufacturer who have 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 and Your 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 likely will be increases in part demand. Likewise, field sales personnel need to communicate the company’s new pricing strategy with their customers.
6. Test and validate…Before diving right in, select a grouping of specific parts, then 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 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 the vehicles were in the shop. We realized it was a must to know what the competitive pricing were - InteliChek helped us understand the competition in our market."