Today I would like to share some of the mistakes I have made during my years in aftermarket pricing. I hope that by reading this material, you will be able to avoid as many of them as possible. I guess I’m trying to write the text which would have helped me when I did my first aftermarket pricing project about ten years ago.
To keep it simple, I decided to make a list of criteria which I think are important if a pricing strategy is to last for a long time. I will zoom into attribute-based pricing strategies. The reason is that those usually give the best return but are also the most difficult to manage.
Before we get into this, just a short reminder that when I write “attribute-based pricing strategies”, I refer to price logic, where physical attributes, such as weight, length, power, brand, etc. are used to set the price. In a nutshell, you create groups of similar parts, and in each group you define which attributes should be used. Then you create the price equation based on those attributes. So here it is, the list of what you should try to avoid if you want your pricing strategy to pass the test of time. My hope is that you will be able to avoid most of these mistakes. Enjoy 😊
Mistake #1: Creating too many groups
I used to have some kind of obsession to always build attribute-based price logic. But, for a larger manufacturing company, the number of groups can quickly raise to more than 500. This might work in a implementation project, especially if the implementation is carried out as dedicated consulting project. But will the organization be able to maintain the groups over time? Probably not. Instead, try to keep using attribute-based pricing for captive high turnover business, and avoid using it in the tail pricing.
Mistake #2: Creating too large groups
Remember, the groups should consist of similar parts where the price equation can be created using only a few attributes. Trying to understand and maintain the pricing logic for a group containing 1000 parts will be difficult. When the group starts to contain over 100 parts, you will start to lose the overview. Either the parts are not very similar, or you need attributes that are too complex to describe the differences within the group.
Try to keep your groups smaller than 100 parts if you can. You may not always be able to, but work with this in mind.
Mistake #3: Too small groups
In my obsession to avoid using cost in any price calculation, I ended up creating groups which contained less than 5 parts. The problem with these groups are that the group logic will be very sensitive if you add more parts to it later. The pricing logic is simple and not sophisticated enough when it is built on the bases of only a few products.
In addition, adding many groups with very few products inside can increase the total number of groups without adding much value. So, unless the group is extraordinary when it comes to sales, please consider cost based strategies for these kinds of parts instead.
Mistake #4: Too complex price equations
You know how it is in that project environment. You are deep inside the project tunnel and all the details are clear to you. You have no problem keeping track of how you created that 12-attribute-long equation. And all those attributes are needed to reflect the value correctly!
Creating equations that are too complex is a critical mistake. Think about it. Ok, you can handle the complexity. But what about the team the company will hire 4 years from now? Six years from now, who understand what you have done? How easy will it be for the future pricing analyst to go into the equation and adjust it, or explain it?
I have seen beautiful price creations slowly becoming more and more irrelevant. I have seen pricing teams simply “giving up” when trying to maintain and understand the logic. They do not understand it, so they do not trust it.
Keep it simple. When you can.
Don’t make any of these mistakes yourself. They are 100% avoidable. Make other mistakes instead. 🙂