From Parts Unknown

March 9, 2008
How to identify what might be missing from your parts pricing strategy.

In order to make sure they are taking advantage of every possible cost-saving opportunity, manufacturers are constantly evaluating their current practices to see where improvements can be made. According to a recent report by consulting firm Deloitte & Touche USA, parts pricing strategies are no different.

The firm suggests that moving upward through what it calls a "price maturity model" can help manufacturers reap additional revenues and increase profit margins. Deloitte offers the following pricing strategies to help manufacturers determine which one fits them best:

  1. Cost-plus pricing. Currently the most widely practiced, this method involves taking the cost of a part and marking it up to achieve a desired margin. On the flip side, this can also result in missed opportunities. For one, all relevant costs associated with making/acquiring, selling and distributing a part can be difficult to capture. It also causes manufacturers who effectively negotiate better prices with suppliers to pass those cost advantages on to customers (rather than using them to improve their own profit margins). Customers are immediately and directly affected every time suppliers raise prices, which can make your own pricing appear arbitrary, volatile and driven by market whims.
  2. Competitive pricing. A more sophisticated pricing strategy that involves actively monitoring competitors' prices and adjusting yours accordingly. This approach can work very well in some conditions as it keeps your pricing in line with the market and prevents lost revenue due to prices set either too low or too high.
  3. Point-of-sale pricing. Point-of-sale (POS) data that details channel partner transactions with end customers is increasingly available. This can help you analyze how revenues and margins are distributed throughout the value chain, and it provides you with valuable information on the competitive landscape, including market share, customer loyalty and price sensitivity.
  4. Lifecycle pricing. This involves performing a detailed analysis of product and customer segments and using all the above pricing strategies at different points of time as appropriate. Additionally, by managing large disparate sets of data while institutionalizing disciplined organizational processes, you can sustain the most appropriate pricing over time.

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