Many industrial manufacturers are overlooking a revenue stream that not only may help them survive the downturn, but provide a competitive advantage when economic conditions improve.
Accenture has found that innovative industrial equipment (IE) companies are strategically pricing original equipment service parts as a way to drive greater profitability and strengthen their competitive position for future high performance. Using this strategy, they have been able to generate between $25 to 45 million in annual profit increases.
The pricing of spare parts used to service original equipment, such as home heating and cooling systems and automobiles, has typically remained unchanged for lengthy periods of time. But, given the economy, customer sensitivity to spare parts pricing is increasing. IE companies that are pricing strategically understand this growing shift and are adjusting their pricing strategy to capitalize on the changing market.
These companies serve as an example for the industry, particularly since no one knows how long the slowdown will last. Organizations that are cutting cost to remain viable in the current economy or waiting for better times can no longer afford to do so. By hesitating to find new ways of improving profits, like strategic parts pricing, they run the risk of being left behind by the competition.
IE manufacturers interested in pursuing a strategic pricing strategy first must understand the market in terms of where parts lie on the pricing spectrum. Some will belong to a captive market, where customers consider them a necessity, while others will be part of a competitive market and can easily be exchanged for similar, less expensive competing products. Companies that can distinguish between the two types of demand will be able to create appropriate pricing strategies for profit improvement.
They also will need to determine if pricing improvement opportunities exist within their organization by looking for three common indicators. A sales operation characterized by ad hoc discounting practices, major giveaways in the form of rebates, terms or delivery, and deals that are often uniquely treated is typically the first indicator of a pricing improvement opportunity.
Another sign is a weak infrastructure, which ineffectively communicates pricing and often includes pricing data maintained in different systems, or no systems at all. The third signal involves operating in a fast-paced, complex environment. Companies with fairly undifferentiated products challenged by low-cost competition create a scenario in which cost increases are difficult to pass on to customers. These conditions, combined with having a large product mix, high sales velocity or distributed sales channels, can perpetuate an environment of rapidly fluctuating prices that cries out for strategic pricing improvements.
Establishing a Strategic Parts Pricing Process
Accenture has developed an approach to strategic parts pricing that is generally a four-step process. They include:
- Performing analysis that entails gathering intelligence on the industry, market conditions and competitors. This includes evaluating customers in terms of defining customer targets, the type of equipment they own, customer-perceived value of parts, and determining price elasticity. Profitability opportunities based on part categories, geographies and channels also are part of this step. Moreover, aligning this information with business objectives is key to developing an effective pricing strategy.
- Applying the results from the various analyses to define a parts pricing structure and pricing plans. Pricing structure and techniques should be tailored to meet the needs of a company's specific business situation. For example, an organization that has a competitive advantage or proprietary technology can command a premium, while some parts may decrease in price, increasing customer loyalty, market share and reducing warranty costs.
- Entertaining "what if" scenarios before rolling out the new pricing structure. This should include assessing prices against the competition, determining expected sales volume, and ascertaining the bottom-line financial impact. This effort will help ensure that proposed pricing changes are on target.
- And lastly, measuring results. It is critical that companies know bottom-line results in order to make necessary course corrections as pricing changes are rolled out. It also is important to understand that measurement is not a one-time step. The volatility of pricing demands constant monitoring and evaluation to ensure maximum results.
Staying on the Path Toward High Performance
Sustaining a strategic pricing model within an organization will require a combination of data, system tools, business acumen and training in analytics and technologies to effectively manage the organization's pricing. But, it will be worth the effort. While today's economic pressures may ease if a more forgiving economy takes shape in the coming months, competitive pressures in the industrial equipment industry will not. If anything, they will accelerate.
So, the answer to whether or not industrial companies are prepared for the future economy will lie not only in their ability to stay focused on goals, but to find innovative ways to drive profitability. This will help them remain competitive, prepare for future growth and continue on the path toward high performance. On-target parts pricing may be part of the answer too.
James Robbins is a senior executive for Accenture, a global management consulting, technology services and outsourcing company. http://www.accenture.com/