Welcome to the Ultimate Guide to Market-Based Parts Pricing!

 

We focused on machinery OEMs and how market-based parts pricing allows organizations to confidently increase parts revenues. Find out more with our guide!

We cover what market-based pricing is, why it's becoming more important, what's needed to start, which organizations benefit most, and immediate steps to adapt market-based pricing in your organization.

As manufacturing veterans, we found the time involved in collecting and maintaining competitive market data led to inefficient and incomplete analysis. In April 2020, we launched MARKT-PILOT to provide the market intelligence needed for market-based pricing, in a scalable, on-demand solution.

Our software, PRICE-RADAR, integrates 10,000+ industrial sources to provide a total market analysis of your parts' price and lead time. By eliminating the most time-consuming processes of competitive research, PRICE-RADAR frees your resources to focus on sustainable revenue growth.

When OEMs partner with MARKT-PILOT, we typically find revenue opportunities for 73% of purchased parts and average 20%+ in revenue growth after implementing a pricing strategy fueled with MARKT-PILOT data.

 

 

Keep reading to learn more!

Tobias Rieker

 

Co-Founder & CEO

MARKT-PILOT

 

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Introduction to Market-Based Parts Pricing

 


 

Aftermarket sales and parts represent a significant revenue stream for original equipment manufacturers (OEMs):

 

Parts Contribution to an OEM's Financials:

221005_Parts Contribution to an OEMs Growth, Revenue & EBIT-2
1519912872424

"For machine and equipment manufacturers, spare parts contribute 10% to revenue, 25% to EBIT, and grow at 4% annually"

 

Verband Deutscher Maschinen-und Anlagenbau (VDMA)


 

To ensure a strong competitive footing, OEMs need to get the pricing right for every single part, which requires monitoring the market rates for thousands of SKUs. Yet, many OEMs lack visibility of their competitive pricing position, meaning they do not know their competitors’ pricing, availability, or lead times for the parts they want to sell.

To complicate matters, the frequency of price changes continues to grow as competitors seek to pass along increases in raw material costs and account for inflation, while also attempting to maintain or expand their market share.

Absent a detailed understanding of the marketplace, many OEMs continue to use cost-plus pricing.

 

COST-PLUS PRICING

Cost-plus pricing is the most common approach to parts pricing due to its simplicity and wide applicability; it works for all kinds of parts, manufactured and purchased. Yet, in an increasingly demanding and data-driven marketplace, it has several shortcomings, including wildly fluctuating prices, which can quickly alienate customers, especially if prices are not competitive.

Due to their ability to buy parts in bulk and secure heavy volume discounts, when OEMs apply standard markup on parts they bought at heavily discounted prices, they unknowingly pass on the discounts to their customers.

As a result, OEMs are often cheaper than their competitors without knowing it.

 

MARKET-BASED PRICING

Market-based parts pricing delivers competitive and intelligent 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.

 


 

In today’s marketplace, a machine manufacturer’s customers have many more options when it comes to purchased parts: parts manufacturers, online vendors, distributors, online shops, and marketplaces. Learn more about how to strengthen your organization's spare parts distribution network.

Many of these providers publish their prices and lead times online, putting real-time market intelligence in the hands of customers to make fully informed purchasing decisions.

 

Industrial distribution is evolving, is your organization in lockstep with your customers? 

 

01 - What is Market-Based Parts Pricing?

 


 

Market-based pricing is a pricing strategy dependent on activating real-time market analytics to make informed pricing decisions

221005_Spare Parts 02.3
  • Market-based parts pricing relies on leveraging prevailing market prices for a particular part to inform its price.

    At every stage of the part lifecycle, from introduction to obsolescence, market-based pricing allows an OEM to price parts according to what the market will bear.

    This varies from cost-plus pricing, where the supplier’s cost and the application of a standard markup dictate the price of a part.

     

  • The data driving a market-based parts pricing strategy can help an OEM establish a price in line, above, or below prevailing prices to maximize profit or other strategic objectives.

    An article in the Harvard Business Review underscores the importance of price when it comes to earning profit.

    “The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly.”

  • An OEM can use the intelligence gathered to deploy the market-based pricing strategy and confidently increase or decrease prices for existing parts previously subject to cost-plus pricing.

    Market-based pricing improves revenues by identifying parts priced below market, capitalizing on purchased part exclusivity and leveraging advantageous lead times.

     

     

  • Definition of Market-Based Parts Pricing
  • What Does it Mean to the OEM?
  • Advantage of Market-Based Parts Pricing

Definition of Market-Based Parts Pricing

Market-based parts pricing relies on leveraging prevailing market prices for a particular part to inform its price.

At every stage of the part lifecycle, from introduction to obsolescence, market-based pricing allows an OEM to price parts according to what the market will bear.

This varies from cost-plus pricing, where the supplier’s cost and the application of a standard markup dictate the price of a part.

 

What Does it Mean to the OEM?

The data driving a market-based parts pricing strategy can help an OEM establish a price in line, above, or below prevailing prices to maximize profit or other strategic objectives.

An article in the Harvard Business Review underscores the importance of price when it comes to earning profit.

“The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly.”

Advantage of Market-Based Parts Pricing

An OEM can use the intelligence gathered to deploy the market-based pricing strategy and confidently increase or decrease prices for existing parts previously subject to cost-plus pricing.

Market-based pricing improves revenues by identifying parts priced below market, capitalizing on purchased part exclusivity and leveraging advantageous lead times.

 

 

 

02 - Why Adopt Market-Based Parts Pricing?

 


 

When customers can assess product features, pricing, and lead times online, the way OEMs price matters

Cost-based pricing used to suffice when customers and OEMs lacked overarching views of the competitive marketplace.

Digitization has changed how businesses source their parts. A market-based strategy allows OEMs to price their parts with confidence, reinvigorating their aftermarket business.

MARKT-PILOT recently completed a survey during IMTS 2022, finding "33% of parts managers/directors view increased investments supporting direct-to-buyer initiatives are the largest trend of 2023".

When an OEM prices its parts using a data-driven approach, it can quickly adapt to prevailing market conditions. Market-based parts pricing permits the forces of supply and demand to operate, allowing an OEM to price its parts according to what the market will bear while requiring customers to pay a fair price for the parts they need.

 


Parts Warehouse Featured in the Ultimate Guide to Market-Based Parts Pricing

PRICING'S EFFECT ON THE BUYER'S PERCEPTION

When a part appears overpriced, a majority of customers will disengage from the OEM. Acting in their organization's best interest, a B2B buyer will continuously buy parts from one of the OEM’s countless competitors if the price or lead time is right.

Alternatively, if a part is underpriced, almost all customers will buy the part for below-market rates for as long as it is available. It's in the buyer's best interest to continue to save costs, especially when their preferred OEM is leaving money on the table. 

 

LEVERAGE DATA TO INFORM OPERATIONS 

While a market-based pricing strategy allows OEMs to charge a competitive price backed by data, it also allows for the development of alternative pricing strategies. For example, having established the competitive price for a part, an OEM may decide to charge below the market rate to earn more market share or above it if it deems the part superior to those offered by competitors. In either event, the OEM possesses the data to drive its pricing strategies.

 

BUSINESS BUYERS ARE MORE INFORMED THAN EVER

It’s also important to acknowledge that OEMs don’t want to deploy an e-commerce platform with publicly available parts and prices if they use cost-plus pricing, as this would allow customers to compare prices that may not be in line with the prevailing market prices. An OEM would miss out on profit if it offered the part for less than competitive prices.

Furthermore, it is more difficult to adjust a previously published price than to establish the correct price upfront.

 

EMPOWER AFTERMARKET SALES 

Market-based pricing also empowers the aftermarket sales team as it provides them with competitive pricing they can confidently share with new and existing customers.

Instead of relying on cost-plus pricing, the sales team can rely on market-based prices, backed by data and robust analysis.

 

CONTINUE TO PROVIDE CUSTOMER EXCELLENCE

For parts with a long tail, meaning parts developed years prior for which demand is low but constant, market-based pricing can contribute sustained streams of revenue. Market-based parts pricing can also justify keeping SKUs with low turnaround cycles in stock.

In addition to contributing to the bottom line, supplying older parts for longer will build customer loyalty. And when deciding whether to launch new products and equipment or enter new geographical markets, creating financial forecasts using market-based parts pricing can provide a sufficient profit over the long haul to justify expanding a product line.

 


 

In many cases, market-based pricing can raise the profile of the aftermarket business, transforming it from an afterthought to a critical component of the OEM’s business model. Market-based pricing for parts gives customers confidence and allows OEMs to increase margins for parts since their prices are competitive and fair in the minds of the customer.

 

03 - What's Needed to Start Market-Based Pricing?

 


 

An OEM requires real-time market intelligence to adopt market-based parts pricing

Data used to derive prices must be accurate, timely, and include every competitor. A manual approach for market-based pricing systems will not execute effectively across all distribution channels and required geographies.

 


Agricultural Tiller - Ultimate Guide Section 3

ALL-ENCOMPASSING MARKET DATA OVERVIEW

The global marketplace is simply too large and dynamic to expect a team of analysts to maintain real-time, accurate pricing intelligence. Manual research with a focused approach on a few key parts can work, but it cannot scale or deliver full market coverage. The labor-intensive work can utilize too many resources to be profitable, leading to the prominence of cost-based pricing.

Efforts to collate and analyze up-to-date market intelligence will inevitably struggle due to the part's market complexity. With more than 50,000 OEMs globally, selling over 5 million parts, and up to 2,000 distributors within a country, manual approaches to market intelligence fall short. 

 

LIMITATIONS OF DIGITAL DATA COLLECTION 

Generic web crawlers allow an OEM to automate and scale its approach to gathering pricing intelligence, yet due to technical limitations, they cannot limit their focus to certain industries, do not offer online and offline market coverage, and only supply raw data that requires analysis and interpretation.

 

INTELLIGENT MARKET SOLUTIONS

Intelligent automation provided via dedicated solutions can deliver a comprehensive and fully automated approach to gathering market intelligence.

Using such an approach, OEMs can focus on specific sectors and quickly gather online and offline market data to inform their pricing decisions. Global coverage and the continuous nature of the analysis mean that an OEM’s pricing knowledge remains current, complete, and accurate. By limiting manual efforts, intelligent solutions free resources to then dedicate to acting on the new market intelligence

Using this approach allows OEMs to gather and compare pricing automatically. It also provides a scalable approach. Embracing a data-driven approach to pricing decisions allows OEMs to adapt quickly to changes in the marketplace, maximizing internal resources and their return on investment.

 


 

Take the first step towards market-based pricing now!

Calculate your ROI
 

04 - Which Organizations Should Use Market-Based Pricing?

 


 

The best candidates sell purchased parts directly to their customer base or recommend prices to their dealers

Manufacturers considering the move to market-based pricing should believe that parts sales are a major driver of revenue, profit, and growth opportunities; organize their aftermarket team as a profit center; and desire to grow their parts business, its share of revenue, and its contribution to the bottom line.

 


Man Using Ipad in Warehouse - Ultimate Guide Section 4

Purchased parts typically make up 30% to 100% of overall parts revenue.

Companies that manufacture equipment and earn at least $30 million in total annual revenue are good candidates for market-based pricing. Manufacturers that earn $100 million+ in revenue can significantly improve their revenue and profitability when they revisit how they price parts.

The best candidates will want to sell purchased parts directly to their customers rather than allowing them to buy from third-party vendors. The business will have already taken the initial steps to digitize its parts business, which could include establishing e-commerce channels, direct-to-customer channels, etc.

Pricing decisions should be made locally rather than centralized overseas as local market dynamics often vary across regions or distributors. 

Market-based pricing works best in sectors with scattered distribution, meaning industries that often have tens to hundreds of distributors competing for parts market share. We've found the best industries to use market-based pricing strategies include:

 


  • Packaging machinery
  • Machine tool equipment
  • Agriculture machinery
  • Woodworking machinery
  • Plastics processing
  • Welding equipment
  • Crane & material handling equipment
  • Cutting tools machinery
  • Metalworking machinery
  • Construction equipment
  • Commercial HVAC
  • Mining machinery
  • Food processing machinery
  • Extrusion machinery

 

05 - Get Started With Market-Based Parts Pricing

 


 

An OEM develops a clear picture of its aftermarket sales potential by leveraging reliable market data

Depending on the volume of SKUs to be analyzed, compiling market-wide results will take just 7 to 14 days to complete.

To facilitate a seamless process, manufacturers should ensure parts data quality within their existing ERP or inventory management platform. If the data is spread across multiple business units, a centralized repository of their parts portfolio will ease communication between departments or teams.

Including information such as the manufacturer’s part number, name, group, purchase and sales price, and lead time.

See how a thermoforming OEM was able to increase revenue by $4MM in two years after adopting a market-based parts pricing strategy informed by MARKT-PILOT's market-wide price and lead time data.

 


Get-Started-With-Market-Based-Parts-Pricing

 

IDENTIFY MARKET OPPORTUNITIES  

Integrating real-time market intelligence will provide the market price, including prices charged by specific competitors, and compare your lead time against competitors’.

This exercise is to help an OEM analyze its entire parts portfolio to ensure each SKU is priced competitively and in line with the company’s strategic goals. This analysis will also generate pricing benchmarks from real-time market data and uncover price adjustment opportunities.

It will ensure an OEM has the information to price its entire parts portfolio at competitive rates, including identifying parts that are underpriced, overpriced, or exclusive.

 

DEVELOP ACTIONABLE MARKET INSIGHTS

From our experience helping OEMs integrate real-time market intelligence in their parts pricing, OEMs uncover approximately 22% of parts that are underpriced, around 52% of parts that are exclusive and candidates for premium pricing, and over 22% that are overpriced – 

On average, just 4.1% of parts are priced competitively.

Competitive parts intelligence can also generate pricing data for new parts that the OEM has yet to sell on the open market, avoiding mispricing throughout the part’s lifecycle.

 

KEEP PULSE OF MARKET DYNAMICS

As the competitive landscape changes, the pricing framework generated via this analysis allows OEMs to monitor and react to market changes quickly. Just as important, it provides a sustainable digital foundation to migrate the OEM from manual SKU pricing to an automated approach that is cost-effective and far more responsive to changes in market conditions.

While some may view the shift to market-based pricing as a one-time event, monitoring competitors on an ongoing basis is critical to helping OEMs generate significant increases in revenue and profit. Due to inflation and cost surges, third-party vendors change their prices constantly.

To react quickly, avoid leaving money on the table, and stay competitive, OEMs need up-to-date information, not just a one-time analysis.

 

Deliver Higher Levels of Customer Satisfaction

While such analysis focuses on the financial benefits of competitive pricing, it also drives improvements in business reputation and customer satisfaction. A data-driven approach to pricing is simple to explain to customers.

Moreover, customers can verify the accuracy and integrity of an OEM’s pricing by conducting independent research.

 

 


 

OEMs that commit to market-based pricing often generate ROIs of 1,000%+

Check out real-world results below!

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