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3 Tips to Generate More Sales and Profit with Spare Parts

Particularly during crises and beyond, the spare parts business has been and remains an important source of support for machine manufacturers to improve profitability and customer satisfaction even in difficult times.

3 Tips to Generate More Sales and Profit
3 TIPS TO GENERATE MORE SALES AND PROFIT WITH SPARE PARTS

3 Tips to Generate More Sales and Profit with Spare Parts

Particularly during crises and beyond, the spare parts business has been and remains an important source of support for machine manufacturers to improve profitability and customer satisfaction even in difficult times.

For a variety of reasons, machine manufacturers are facing increasing competitive pressure in the parts business:

Purchase Parts

End customers can purchase parts from from a variety of third-party suppliers (parts suppliers, online stores, spare parts platforms, etc.)

Compare Options

Customers compare prices and delivery times of different suppliers to find the optimal price

Price change

Competitors frequently change their prices to respond to inflation and cost increases

Calculation

OEMs rely on old overhead calculation for pricing their spare parts

Supply chain bottlenecks

Supply chain bottlenecks for critical parts

Machine manufacturers typically generate more than 60% of service revenues from spare parts.

However, around 73% of their commercial spare parts have the potential for price increases - the result: lost sales. These include parts priced below market levels and parts with exclusivity positions, for which customers can hardly find an alternative source of supply.

To summarize: a manufacturer with annual sales of 30 million euros usually has an untapped sales potential of 4 to 6 million euros and the opportunity to increase its profit margin by 9 to 21%.

The following three tips will help you identify this lost revenue growth potential and realize it in practice.

3 TIPS TO GENERATE MORE SALES AND PROFIT WITH SPARE PARTS

Tip 1: Leverage Potential for Price Increases & Increase Prices Confidently

22% of off-the-shelf parts are underpriced compared to third-party prices. As a manufacturer, you are missing out on valuable revenue and margin for every underpriced part that is sold. There are three different reasons for this phenomenon:

1. Conventional Cost-Plus Pricing Process

Machine manufacturing companies usually buy larger quantities of purchased parts, which gives them very good purchase prices and discounts. Selling prices for spare parts are then typically set at standard markups based on purchase costs. As a result, even with markups of more than 60%, OEMs‘ selling prices are sometimes significantly lower than those of third-party suppliers.

The fact that many machine manufacturers set the prices for their spare parts only once - when they include them in their portfolio for the first time - further reinforces this effect. In subsequent years, parts prices are only increased by a flat percentage of around 3%, which serves to compensate for inflation. The companies cannot respond to price trends in the industry - market prices for some spare parts, for example, have increased by more than 300% within the last two years!

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2. Highly Complex Parts Portfolio with Many Part Numbers

As a manufacturer, you have many thousands of parts in your portfolio. Thereby it is a big challenge to keep the prices up to date  because the markets are currently very dynamic and new parts are constantly added to the portfolio. On the other hand, customers have more and more choices and comparisons on the open market, and they know that many manufacturers price their spare parts far too low.

3. Your Customers Will Never Tell You That You Offer Parts That Are Too Cheap

Customers are always complaining about the high price of spare parts - so manufacturers don‘t think about whether prices on the market are set too low. But think about it for a moment. Your customers won‘t tell you if your prices are set too low compared to the market.

On average, spare parts have a price increase potential of more than 30% - which can be a relevant factor for business success. However, this requires transparency and an overview of the market. Our solution offers you exactly that: automated market price research on your spare parts and an analysis of your performance in the market.

4. Understand the Structure of your Parts Portfolio

It‘s critical to figure out which parts are currently underpriced. Especially if you are looking at a large portfolio with many part numbers (1,000+). There are several indicators, such as the frequency and degree of price increases, as well as sales volume for parts and associated profit rates.

5. Amplify Existing Data with Market Information on the Competitors' Prices

While the above indicators will help you better understand your portfolio, only current market data can be used to uncover any undervalued parts in your portfolio.

6. Continuously Monitor Market Price Changes

With high inflation rates and cost increases due to volatile supply chains, price changes are constantly occurring. Third-party suppliers are increasing prices for spare parts at a rapid pace. It is therefore essential for engineering companies to keep up with these price trends and not lose sales and increase margins.

In summary, raising the price of underpriced parts is a short-term, low-risk way for manufacturers to increase sales and profits on spare parts.

3 TIPS TO GENERATE MORE SALES AND PROFIT WITH SPARE PARTS

Tip 2: Identify Exclusivity & Seize Market Position  

51% of commercial parts are typically so-called exclusive parts from the machine manufacturer - meaning there are little to no third-party suppliers offering these parts.

Although few of these parts are proprietary, customers have a hard time finding alternative suppliers for these parts for the following five reasons:

1. Part Manufacturers May Not Offer the Parts Online

This makes it very difficult and time-consuming for the end user to compare prices. In many cases, they are not willing to invest this effort and will buy directly from the manufacturer.

2. Local, Small Parts Manufacturers May Sell Only to Select Customers

Since machine manufacturers usually sell their equipment to other regions and countries, they could be exclusive parts suppliers in many of these regions and countries without knowing it.

3. Parts Manufacturers May Decide Not to Sell Parts in Small Quantities to End-Users

Due to their sales strategy and organization, many parts manufacturers avoid selling to end users for a variety of reasons.

4. Manufacturers Have Exclusive Distribution Agreements With Parts Manufacturers

Joint distribution agreements or other agreements often exist between the parts manufacturer and the machine manufacturer that specifies that sales of parts may only be made by the machine manufacturer.

5. Manufacturers Advertise with the Re-Branding of Commercial Parts to Give Users the Impression of Exclusivity

These efforts can include various measures, such as packaging, labeling, providing unique part numbers, or other value-added measures. These challenges lead to the previously mentioned fact that machine manufacturers are the exclusive supplier for many parts without being aware of this market position. How can you as a machine manufacturer take advantage of this market position and increase the prices for monopoly parts? 

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3 TIPS TO GENERATE MORE SALES AND PROFIT WITH SPARE PARTS

Tip 3: Use Automation and Reduce Manual Effort in Pricing

Most machine manufacturers face the challenge of accurately pricing several thousand to over 100,000 spare parts. Trying to manage this complexity in the face of uncertain supply chains, dynamic markets and increasing competition can be a difficult task for service managers.

The key to success is to automate everything you can. This helps your team focus on the tasks that really matter - such as analyzing your portfolio, applying strategic thinking, and setting prices that increase your revenue and profits while keeping your customers happy.

To confidently raise prices on underpriced and exclusive parts, automated market intelligence is essential on a large scale.

1. Identify Underpriced and Exclusive Parts

The very first step is to perform an initial analysis to identify lost revenue potential related to underpriced as well as exclusive parts and to get a valid overview of your own performance in the market. Review your portfolio and enrich your internal analysis with market information and pricing data from competitors. A look at your entire parts portfolio will help you set priorities and identify opportunities.

2. Continuously Monitor Price Changes in the Market

Avoid mistakes that are common in other industries: It is essential that you, as a machine manufacturer, continuously monitor and respond to competitor price changes. A one-time analysis of your portfolio will not give you sustainable success. Recent analysis shows that market prices for more than 50% of purchased parts change significantly over a three-month period. Responding to market dynamics is critical to building a sustainable competitive advantage, so regular analysis is essential.

In summary, raising the price of underpriced parts is a short-term, low-risk way for manufacturers to increase sales and profits on spare parts.

3. Streamline Internal Processes and Automate As Much As Possible

We realize that aftersales is about much more than getting the pricing right on spare parts. Industry leaders rely on proven technologies like market research tools and learn from others to automate and streamline processes. Successful service leaders prioritize these investments to prepare their team for the future and focus on what really matters: Keeping customers happy while growing the business and turning a profit.

Automating market research and using that information to price parts, is a necessary foundation to increase sales and profits on undervalued and exclusive parts.

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3 Tips to Generate More Sales and Profit with Spare Parts

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3 TIPS TO GENERATE MORE SALES AND PROFIT WITH SPARE PARTS

Customer Success Story: Kardex Mlog Increases Lead Time Capacity for Spare Parts

THE CHALLENGE

Achieving the optimum price while maintaining customer satisfaction - an extreme challenge for machine builders at the moment. This is also the case for Kardex Mlog.

Until now, price differentiation could only be defined by product groups and was therefore associated with a great deal of effort. Price adjustments only took place once a year. The challenge: customers can obtain information at any time on all prices, delivery times and availability of spare parts freely available on the market.

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EFFICIENT PRICING WITH STRONG MARKET DYNAMICS

The solution? The PRICERADAR from MARKT-PILOT. Kardex Mlog has been using the MARKT-PILOT solution for more than a year and has since been able to conveniently adjust spare parts prices to the market several times a month and thus react immediately to market dynamics.

Especially in the current time - with high market dynamics - a tool like PRICERADAR pays off especially. After all, what‘s wrong with adjusting prices three times a year? Mlog‘s customers benefit from the increased flexibility and consistently increased potential.

Considering the recent challenges, increasing market dynamics and new competitors entering the market, to gain a competitive advantage in the spare parts business, you need a change. It‘s a huge challenge. But there is good news! The tools and technologies needed to succeed in the digital environment are ready to go and have been tested by leading companies in various areas of the machinery and equipment industry.

Manufacturers who invest in market intelligence technologies and use the new knowledge to automate and optimize pricing will be successful and ahead of the competition in the future. MARKT-PILOT helps you use your time more efficiently to solve today‘s after-sales challenges while increasing parts sales and profits.

Want to learn more? Contact us today to learn how other companies have made the leap and how you too can take the first step to market-driven parts pricing.

Learn more about MARKT-PILOT and how we can help you generate more sales and profit with your spare parts.

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