I have seen it so many times. How companies cure the aftermarket business with the same medicine used for their other businesses.
And guess what… they usually end up giving away margin, losing sales volume, and sometimes even destroying their brand reputation.
Have you seen it too?
So how can you optimize your aftermarket without ending up in any of these pit-falls? Well, the first thing you need to do is understand how your aftermarket is different from other parts of the business.
Demand cannot be forced
The demand in the aftermarket is not something you can “create” with discounts or “deals”. Sorry.
Why is that?
Well, think about it from the customer’s perspective; when do you usually buy spare parts? Answer: WHEN SOMETHING IS BROKEN!
I have seen how companies are trying to hit their aftermarket sales target through discounting towards their sales channels. “Let’s give the main distributors 30% extra discount to hit the annual target”. The only thing they end up doing then is selling today instead of tomorrow, and to a lower price. Sound smart? Do not do it.
Unlike most other business, aftermarket demand cannot be created with lower prices. Make sure to set prices that make sense and that you can defend, and then give your channels reasonable margin to resell your parts. Keep it clean and simple.
Do not compete with yourself
“Look, this competitor is selling our captive part at this low price; we should reduce our price”. Ever heard that?
Before decreasing prices, ask yourself from where this customer sourced the parts? If the parts are captive and if they are not copied parts, then the answer is that the competitor purchased them from your own company.
Instead start going after the root problem. From what I have seen, the root cause is usually someone whom has set VERY high discounts on the part, which enabled the channel partner to purchase it cheap, and now they are selling it cheap. What to do? Remove this deep discount!
Watch out for the temptation of pushing it too far
The price elasticity for the aftermarket is different than for consumer products. If you increase the price, your volume will to a large extent not be affected. Why? Because the customer purchases spare parts when they are needed, not because they got a great deal today. But be careful. Do this wrong and you can destroy your brand as well as lose your sales volume.
One company was enjoying extremely nice aftermarket sales and margin improvement due to pricing. The management team started paying attention. They wanted more. And more. And more. Then all the sudden, volume started to drop at a high rate, and customers started to complain more than ever. What happened?
They pushed the prices “over the cliff”. The price is not sensitive, but only as long as the customer still perceives them as reasonable and fair. This is very important to understand. Be also aware that your long–term brand value can be damaged if you push things too far.
You need to stand your ground when management comes asking for more. Your prices need to make sense, and they need to be fair and possible to explain. Never forget that.