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Driving Success: Exploring the Top Parts Pricing Strategies for OEMs

In this article, we will do a deep dive into the most common pricing strategies to help you navigate which spare parts pricing strategy is best for your specific parts business

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230314_Mockup Poster Parts Pricing Strategies for OEMs EN-3

As an OEM (Original Equipment Manufacturer), the pricing of your spare parts is a critical component of your overall business strategy. The right parts pricing strategy helps you increase profits, attract new customers, keep existing customers, and stay ahead of the competition. With so many options available, it can be difficult to know where to start.

IT'S ALL ABOUT THE RIGHT PRICING STRATEGY
Spare Parts Warehouse HOLMER - Increase Parts Revenue With the Right Pricing Strategy
PARTS PRICING STRATEGIES

The Five Most Popular Methods

PARTS PRICING FOR SUCCESS

Choosing the right parts pricing strategy is a critical factor in the success of an OEM for several reasons, including:

Impacts revenue and profitability

Pricing decisions have a direct impact on a business' revenue and profitability.

Differentiates products

Spare parts pricing strategies help OEMs differentiate their parts from competitors. By offering a unique pricing model, they can attract customers looking for more value, better quality, or a premium part.

Reflects market demand

Choosing the right parts pricing strategy requires a thorough understanding of the market demand for part. By aligning prices with customer demand and the market, OEMs can increase sales and profitability. 

Influences customer perception

Pricing impacts how customers perceive a part or business.  

Responds to competition

Competitors in the market can significantly impact the success of an OEM. By choosing the right pricing strategy, OEMs can respond to the competition and ensure they remain competitive and attractive to customers. 

PARTS PRICING STRATEGIES

01 Market-Based Parts Pricing 

This parts pricing strategy is one that relies on activating real-time market analytics to make informed pricing decisions.

Market-based pricing of parts delivers competitive andvintelligent pricing increases that grow revenue and profit. It also allows OEMs to increase their customer share, become a trusted supplier for all parts, and increase win rates. Just as important, it fosters improvements in customer satisfaction as it delivers pricing and lead times in line with the market.

Deploying market-based pricing requires access to real-time market intelligence regarding a part’s pricing, availability, and lead time. And OEMs need this intelligence for their entire portfolio.

MARKET-BASED PRICING GUIDE OUR SOLUTION

Why is market-based pricing the optimal parts pricing strategy for OEMs?

  • Reflects True Value

  • Responds to Demand

  • Competitive Advantage

  • Maximizes Profits

  • High Customer Satisfaction

A market-based pricing strategy allows OEMs to price their parts based on their true value in the market. This means that prices are set based on what customers are willing to pay for the part, rather than just the cost of production. 
By pricing their products based on market demand, OEMs can respond quickly to changes in the market. If demand increases, for instance, they can increase prices to capture more revenue. If demand decreases, they can lower prices to maintain sales volumes. 

By setting prices based on market conditions, OEMs can gain a competitive advantage over their competitors. If they can offer similar products at a lower price, for instance, they can attract more customers and gain market share.

Market-based pricing allows OEMs to maximize their profits by setting prices at the optimal level. By pricing their products too low, they risk leaving money on the table, while pricing too high can lead to lost sales and lower profits.

By setting prices based on market demand, OEMs can ensure that customers are getting a fair price for their products. This can help improve customer satisfaction and build brand loyalty over time.

How to implement market-oriented parts pricing simply and efficiently-1
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PARTS PRICING STRATEGIES

02  Cost-Plus Parts Pricing Strategy

A cost-plus parts pricing strategy involves adding a markup to the cost of production to arrive at the final selling price. The markup is typically a percentage of the cost of producing the product, and it represents the company's desired profit margin. This strategy is straightforward and easy to implement but may not consider market trends

The cost of producing a product includes direct costs such as materials, labor, and manufacturing overheads, as well as indirect costs such as rent, utilities, and other expenses. The markup is added to the total cost to determine the final selling price.

For example, let's say a company produces a product for $100 and wants to make a 20% profit. It would add a 20% markup to the cost of production, resulting in a selling price of $120. This ensures that the company covers its costs and makes a profit from each sale.

 

MORE ON THIS PRICING STRATEGY

A cost-plus parts pricing strategy provides a simple method for determining the price of a part. It also ensures that the company covers its costs and makes a profit on each sale. This pricing strategy can potentially useful in situations where there is limited competition or where the market demand is stable.

With that being said, cost-plus pricing does have several limitations. It does not consider market demand or competitors' pricing, which can lead to overpriced or underpriced products. Additionally,  it does not take into consideration customer's willingness to pay. An example from Harvard Business Review states: "A customer may be willing to pay far more, in which case the cost-plus price will be too low, letting profit go uncaptured." Moreover, it may not be suitable for businesses with high overheads or those that face fluctuating costs, as it may result in inconsistent pricing.

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Exploring the Top Parts Pricing Strategies for OEMs

Discover the most commonly used parts pricing strategies and make the right decision for your business.

 

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PARTS PRICING STRATEGIES

03  Value-Based Parts Pricing

This strategy focuses on the perceived value of the product to the customer, rather than the cost of production. By offering a premium part with unique features and benefits, OEMs can charge a higher price and increase profitability. 

Kardex Werkstatt Halle-1

Value-based pricing is a parts pricing strategy based on the perceived value of a product or service to the customer, rather than the cost of producing it.

The goal of value-based pricing is to capture a portion of the additional value that the customer receives from using the product or service. This pricing strategy requires a deep understanding of the customer's needs and preferences, as well as the value proposition of the product or service. 

In value-based parts pricing, the price of a product or service is determined by the customer's willingness to pay for it, which is often higher than the cost of production. This is because customers are willing to pay more for a product or service that provides them with greater benefits or solves a problem more effectively than alternative options. 

Value-based pricing can be an effective pricing strategy as it has the potential to lead to higher profits and better customer relationships. By setting prices based on the value provided to the customer, a company can differentiate itself from competitors and build a loyal customer base.

A value-based parts pricing strategy requires careful analysis and research to understand the customer's needs and preferences and accurately determine their willingness to pay. This strategy has other shortcomings such as wildly fluctuating prices, which can quickly alienate customers, especially if parts prices are not competitive. 

PARTS PRICING STRATEGIES

04  Penetration Parts Pricing

This parts pricing strategy involves setting a low initial price to quickly gain market share and attract new customers. This strategy can be effective for new or unknown OEMs but may not be sustainable in the long term. 

Penetration pricing is a parts pricing strategy used by companies to introduce a new part to the market by setting a low price to attract customers. In the context of replacement parts, penetration pricing is used to set low prices on replacement parts to attract customers who may be price-sensitive or reluctant to pay for higher-priced parts from a new or unknown supplier. 

The goal of penetration parts pricing for replacement parts is to gain market share and build brand recognition. By offering replacement parts at a lower price, a company can gain a foothold in the market and attempt to attract customers who are looking for a good deal.  

Penetration parts pricing is often used in industries where there is an elevated level of competition and price sensitivity, such as the automotive or consumer electronics industry. It is also commonly used when a company is introducing a new product or service to the market and needs to quickly build a customer base. 

There are some drawbacks to the penetration pricing strategy. By setting a low price, a company may attract price-sensitive customers who are not loyal to the brand and may switch to a competitor if a better deal is available. Additionally, the low price may be seen as a signal of low quality or reliability, which can damage the company's reputation over time. 

To make penetration parts pricing effective, a company must have a solid plan for building brand recognition and customer loyalty. This can include offering high-quality parts, providing excellent customer service, and implementing a loyalty program or other incentives to encourage customers to return. 

ARTICLE

Overview of Parts Pricing Strategies

There are many different pricing strategies, each with its advantages and drawbacks. It's important to understand the various methods to choose the best one for your parts business. 

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PARTS PRICING STRATEGIES

05  Dynamic Parts Pricing

This parts pricing strategy involves adjusting prices based on market demand and real-time data. This can help OEMs respond quickly to changes in the market and maximize profits. 

Dynamic parts pricing is a parts pricing strategy used by companies that sell replacement parts for machinery or equipment. It involves setting the price of a part based on the age, condition, and maintenance history of the equipment it is intended for. The goal of dynamic parts pricing is to align the price of the part with the value it provides to the customer, rather than using a fixed pricing model based on cost or market demand. 

In dynamic parts pricing, the price of a part is determined by the expected remaining lifespan of the equipment it is intended for. A part that is expected to last a long time in a well-maintained piece of equipment will have a higher price than a similar part for a piece of equipment that is older, has a history of breakdowns, or has been poorly maintained. This pricing strategy helps to ensure that customers pay a fair price for the value provided by the replacement part. 

Holmer detailaufnahme Motor-1

Dynamic parts pricing requires accurate data on the age, condition, and maintenance history of the equipment. This can be obtained through regular maintenance logs, diagnostic tests, and other sources of data. The data is used to determine the expected remaining lifespan of the equipment and the expected demand for replacement parts. 

A dynamic parts pricing strategy can be complex and require significant resources to implement. Accurate data must be collected and analyzed regularly, and the pricing model must be updated as the equipment and market conditions change. Additionally, there may be concerns about the fairness of the pricing model and the potential for customers to manipulate the data to lower prices. 

Choosing the right pricing strategy is a key factor in the success of your parts business. By aligning prices with market demand, differentiating products from competitors, and responding to competition, OEMs can maximize revenue and profitability while building a strong brand reputation and customer loyalty.  

Take the time to evaluate your unique situation, goals, and market trends to determine the best strategy for your OEM.  

Portrait-Jim-Swim-1
Jim Swim, Senior Account Executive

Evaluation from our experts:

What are the key factors to consider when choosing a new parts pricing strategy?

"Customer acceptance is key.  You must market to your current customers the reasons for a change and have a plan to make sure they understand the reasons. Ensure you have strong data concerning market prices, prior to making changes. Determine the increased revenue that potentially can be achieved."

Why can taking the time to decide on a pricing strategy positively impact your parts business?

"For most manufacturers, the aftermarket business is key to their revenue and profit.  Because this is such an important part of any manufacturer’s business it is imperative to 'get it right.' This often takes some time and effort, but it will prove very valuable for the entire company."

How can a market-based parts pricing strategy influence after sales?

"In today’s environment of supply chain issues and inflation, it is especially imperative to keep up with all the market trends - including purchase prices, selling prices, and delivery times.  Market-based prices from a very dependable source can make the difference between making a lot of revenue and making little to no revenue. It is important to keep up to date on the changes within the market and adjust prices when necessary to protect and increase aftermarket business."

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READ FULL CASE STUDY
SITUATION

 As more and more third-party suppliers appear on the market, customers can easily compare prices and delivery times for spare parts online.

SOLUTION

"With MARKT-PILOT, we are now turning the tables and establishing spare parts pricing in line with the market," says Jochen Schneider, Manager Spare Parts at Kärcher Municipal GmbH. 

RESULT

The cooperation with MARKT-PILOT provides Kärcher Municipal with a transparent overview of the current position of purchased parts on the market and summarizes at a glance which parts are priced too high or too low. 

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