Why implement new pricing strategies? And why even think about investing in a new pricing software? What is the purpose? Let’s be honest, it is quite simple. The purpose is to generate more profit. Period.
Sure, there are other important reasons too. For example, we all know how overpricing can hurt the long-term brand value and customer loyalty. That matters also. But without that pure financial gain, which is found through avoiding setting prices too low, it would be difficult to justify spending resources on implementing new pricing strategies.
The key question, then, is: How large a financial gain could you harvest from your aftermarket? How do you find and implement it? And how can you make that new profit level sustainable over time?
In this article, I will share my thoughts on how to answer these questions. My intention is to share what I have seen and learned during the last ten years as a pricer, a reflection of my own experience of implementing smart aftermarket pricing for multiple B2B and B2B2C companies over the years.
What determines the potential?
First of all, let’s try to figure out the range of your profit potential. I will approach this question by looking back on the results from all my projects and reflect on the main factors making it easier and more difficult to increase the profit.
What is possible if all factors point in your favor, and what is the worst-case potential if things are really difficult?
Looking at the projects in which I have been involved, that range is from 2 percent up to as much as a 12 percent price effect. And remember, if you do this right that result will stick year after year. So, if you realize a 4% price increase and your sales are currently 100 million Euros, it means that your work generates 4 million Euros extra each year. Not bad!
So, let’s get down to business. Below, I will list the main dimensions which I have found makes it easier or harder to increase profitability:
Current quality of pricing: The better your current pricing strategies are, the less additional potential your company has. If today your company is using mainly cost pricing, that is a sign of low quality. As well, too much local ad-hoc pricing is a sign of low quality. But what you need to do to really know the potential is to analyze your data, understanding the overall strategies being used, as well as deep diving into individual sections and seeing if the pricing makes sense from a value and market perspective.
Level of competition: The lower your competition, the better the chance you have to implement price increases. Basic stuff. For aftermarket, what you should be looking for is what proportion of your business consists of unique original parts. If your business to a large part consists of sales from universal products (commodities), then your competition will be higher. You can read more about how to view competition in “Why Aftermarket Business is Different”.
Local resistance: Your sales are likely to occur through local sales offices. Your relationship with the management of those offices, as well as the company balance between local and central decision power, will influence your ability to increase profitability. If large parts of the revenue sit in countries where the management blocks your price adjustments, that will affect the results negatively. I am sharing some more thoughts on this subject in “Why Aftermarket Pricing is Best Done Centrally”.
There are other dimensions affecting your result as well, but the three listed above I found have had the most influence. Next, I will share how you can get started.
How to get it done
So how is it done? Well, new pricing methodologies can be implemented in many ways, but here I will share the approach that I usually take.
The first thing I do is to analyze the current way of pricing. Find out what is working well, what is not working that great, and any constraints you might have. This will include how prices are calculated, who is doing what, what price lists are available and how those price lists are linked.
After understanding the as-is situation, the next step is to define the best suitable pricing strategy for each category of your portfolio. It is critical to pick the right pricing strategies if you want to be successful. You can read about some suitable strategies in “Four Pricing Strategies for the Aftermarket”, but of course there are other strategies which could be useful too.
After your strategies have been defined, you can get busy configuring the pricing strategies and analyze the prices they produce. There are plenty of pitfalls in this process, and to save yourself from some of them you can read about mistakes I have personally made in “My Top 4 Mistakes in Aftermarket Pricing. Save Yourself Some Pain & Don’t Make Them Yourself.”
When you start getting some proposed new prices, it is time to put the new strategies to the test in front of the most relevant local teams. Make sure that you really understand why your new prices are better, so that you can explain and defend them. See the meetings with the local teams as a great source of input, which will help you to improve the pricing further. These meetings can be very difficult and sometimes unpleasant. Do not give up!
Now you are getting closer to the end game, a list of new prices to be implemented in your ERP. I usually call this step a “price repositioning”. Now it is time to do the only thing that actually matters – changing the prices. Make sure the prices are uploaded to your ERP and please do not forget to carefully monitor the result and be ready to act if needed.
How to avoid falling back down again
Okay, you implemented new prices. You earned profit for your company. Great job indeed! Are we done now? I think you know the answer, absolutely not!
If you want to stay at this new profitability level, and potentially even gain some more, you need to use your new pricing when doing all the operational pricing going forward. It is time to decide – are you serious about spares pricing, or was this a “one-off” effort and then right back to cost plus again. This is where pricing software comes into the picture. Find software which suits your needs well and make sure it is integrated with your ERP. But remember to pick software, which is flexible, so you can adapt it when you come up with new pricing ideas!
I wish you all the best and good luck taking your profitability to a new level!