In my career, I have been implementing pricing strategies for numerous manufacturing companies. Even though they all are unique, they usually have the following similarities in their portfolios:
They have thousands of parts
There is a mix of manufactured and purchased parts
Some of the manufactured parts are easy to copy, others are not
The cost of the manufactured parts is driven by factors not relevant to the customer; is the product in mass production? Have we switched suppliers? Are there setup costs needed to start production again? Etc.
Few parts represent the majority of sales
It’s dangerous to overprice low selling products, as one high price is enough to damage customer relations
So, how best to price such a portfolio? There are thousands of products, you cannot look at each of them individually. The cost is a terrible base for manufactured parts, pricing one too high is enough to upset and lose a customer forever.
What we have ended up implementing is a combination of strategies, all suitable for different parts of the portfolio. Let me share on a high level what these strategies are.
For manufactured parts which are difficult to copy you really want to break the link to cost. Why? The customer will evaluate the price based on the product they see, not based on whether the factory had the part in mass production at the moment or not. The customer does not care about that.
How to price then? Categorize your portfolio into groups of similar parts. For each group, e.g. “Pistons”, decide which physical attributes best represent how prices should be differentiated inside the group. For pistons, it might be the diameter of the piston, or the engine the piston fits. Create a price formula using these attributes as variables. Then pick one of the high selling pistons and do an in-depth analysis of its optimal price. Once you set that price, price the rest using the attribute-based equation.
In addition to the attribute-based calculation, you need to add some validation steps to make sure that your prices do not go out of line. You might want to set up a minimum margin, and you might want to control the speed of transitioning into this new pricing structure. For parts which are easy to copy and have a high turnover, be more careful about setting margins too high.
This strategy fits well for pricing your purchased parts. Why? Because here other companies can usually purchase those parts too, and they will probably have around the same cost structure as you. This means that setting prices that are very different from cost can lead to setting prices that are very different from the competition.
I recommend creating groups here as well. But on a higher level and for a different purpose. Here you want to use groups to decide how much margin you “can” set. If for some groups we know there is less competition, then we can be braver.
This is the best strategy when we have competition, to use the competition price information as part of your pricing strategy. Personally, I prefer to use competitor information to set limits in my pricing. I set prices but make sure not to price myself lower than the competitor or more than 20% higher.
But be careful not to follow your competition down and start a price war. Remember that if you represent a manufacturing company, the pricing strategy of your competitor might be to set a price lower than you. So, when you reduce, they …. yes, reduce.
Bill of Material pricing
The final useful pricing strategy is called Bill of Material pricing, or BOM pricing. This strategy should be used when you are pricing a set of products which can also be purchased individually from your company.
If you sell a box of two products, the price of the box should be logical in relation to your price of the two products inside. So, the strategy here is to set the price to be the sum of the prices inside, while sometimes adding a discount or premium to that base.
To summarize, spare part pricing done well means that you need to adapt your strategies to different parts of the portfolio. Implementing some of these strategies, such as attribute pricing, can be time-consuming and difficult.
But done right, I have seen revenue going up by as much as ten percent without any sales lost. The secret is to increase only the prices that are lower than what the customers are willing to see. Attribute pricing makes it clear when two products with the same attributes have different prices. Clearly, at least one of these prices are wrong.