Spare parts prices are subject to immense fluctuations over the course of a few weeks. In order to remain competitive, machine manufacturers need to align their parts pricing strategy with the market. With that being said, market-based pricing is not simply raising prices, but unlocking the potential of price reductions. For what at first sounds like lowered revenues actually makes a crucial contribution to revenue growth.
Read more about how to secure larger market shares with lower prices and what steps are needed to successfully reduce prices.
In the past, especially in the aftersales of machine manufacturing companies, a lack of market insight and standardized margin markups have driven spare parts prices in one direction - upwards. However, these allegedly revenue-driven increases are often counterproductive for aftersales. For example, if the gap to other suppliers is disproportionately high, the parts in question sell slowly and market share declines.
In many cases, however, prices have to be lowered and adjusted to market levels in order to regain market share and improve the company's public image as well as customer loyalty and satisfaction.
1. Define Goals of Price Reductions
Prior to lowering prices, a number of questions and objectives need clarification in order to define goals, establish procedures and derive a strategy. The focus is on the following objectives:
- Improve the company's price reputation.
- Generate more revenue, increase sales volume and market share.
- Adjust spare parts prices to changes in the market.
- Reduce third-party market share through offering competitive prices.
Note: Price reductions are an opportunity to increase sales volume and market share. In order not to concede margin losses here, a minimum sales volume must be defined to compensate for the reduced margin share.
2. Conduct market research with PRICE-RADAR
The tendency that a part is priced too high must be validated before an actual price correction takes place.
The PRICE-RADAR Sonar and Deep Dive technology identify price potentials of all kinds in their market analysis. These analyses identify the current market position for every spare part, including all items priced above the market price level. If priced too high, there is market share potential for these articles: market share, i.e. sales volume, can therefore be optimized by reducing prices. Machine manufacturers can use this information provided by the PRICE-RADAR research and lower the prices of these spare parts.
3. Evaluate market research
To ensure that market share can be increased by reducing prices, the following additional factors also provide information on optimization potential. These factors can be used to form groups of spare parts. The more arguments are overlapping per spare part, the higher the profitability of a price reduction will be:
- Part is more than 5% above market value: If the price of a spare part lies at least 10% above the mean value of the market price, it is suitable for a price reduction.
- High market density: It is safest to select spare parts for which the market research identifies more than five comparative prices on the market. A high data density amplifies the certainty of information. Plus: the higher the market density, the more likely it is for potential buyers to find and compare these prices on the market.
- Win rate of under 30%: A win rate below 30% indicates that customers find and engage in more attractive offers from other suppliers due to the high price.
- Low sales volume: A low sales volume indicates that a spare part is overpriced and that the sales volume can be increased by lowering the price.
- Value greater than $500: The higher the value of a spare part, the more likely the customer will try to seek alternative offers.
- Non-critical parts: In the case of spare parts that are critical for processes and the overall safety of the machine, price as a purchasing factor usually is of secondary importance since breakdowns or faulty operation result in enormous costs.
- Delivery time in line with the market: Spare parts with a delivery time that does not deviate strongly from the delivery times researched on the market strengthen price as a purchasing argument.
The more factors apply to a spare part, the greater the certainty that the price reduction will be successful.
4. Final steps
If the market research with the PRICE-RADAR and the factors in 2 have qualified parts for price reductions, prices will need to be adjusted in the internal ERP system in order to display quotations and orders and pass these on to customers using the new prices. The success of the pricing adjustment can then be validated by analyzing revenue, margin, sales volumes and monitoring customer satisfaction levels. However, history shows that the quantifiable success of this type of measure is noticed within a year.
5. Marketing: How to advertise price reductions
Price reductions are an opportunity to enhance customer communication: A company's image can greatly benefit from communicating a price reduction, because the image of a fair and favorable partner becomes firmly entrenched in the customer's mind.
- Direct marketing: Individual parts can be targeted directly at a suitable customer base, for example with flyers, e-mail publications, in the web store, social media, or by direct approach.
- Indirect marketing: Many price reductions indirectly improve the company's reputation. With the image of a partner with attractive offers, customers can be won back, even if they have already been buying from alternative suppliers for a while.
- Offer price guarantees: With individual customers, it can pay off to offer price guarantees as a sign of trust. The customer's confidence in the promised price leads to larger purchase volumes.
- Market to a selected customer base: If the stakes of a price adjustment are high, the reduction and associated marketing measures can only be targeted at a specific customer base in the very first move. However, the aim here is to extend the lower prices and corresponding communication to all customers in the long term.
Do you have questions regarding price reductions, MARKT-PILOT or our solution?
Our experts are happy to help!