The spare parts business is a very lucrative source of income for many mechanical engineering companies. However, this also makes it a very competitive field. Finding the right price is essential for survival.
Although the after-sales area often only accounts for 20 to 25% of a company's turnover, many companies generate over 50% of their profits in the after-sales area. After-Sales. The reason for this is usually the spare parts business with its particularly high margins, which are often above the 20% mark.
Holistic approaches are better than simply calculating cost+
Despite the high profit potential of the spare parts business, the opportunities here are not always fully exploited. Prices are often set according to a simple formula:
Cost price + Logistics and administration costs + Defined margin per product group
Successful companies have long since adopted a more holistic approach to setting prices for their products. Holistic pricing logic secures your margins more sustainably so that you are not left out in the cold in competitive markets.
"Pure mark-up calculations sometimes produce interesting results. For example, when a 1m length of tubing is charged four times the price of a 0.5m length of tubing. The simple surcharge calculation can easily lead to such strange scenarios if the purchasing department is not careful. This may seem insignificant in individual cases, but it destroys customer confidence in your prices in the long term." - Dr. Simon Tonat
Parts segmentation in the spare parts business
To be able to define really sensible prices, you need to take a more intelligent approach. You may achieve a positive result with simple "Cost+" procedures, but the success will remain manageable and you won't make it into the Champions League. Therefore, don't just go over your parts lists with a watering can and listlessly add 20% everywhere, but divide your spare parts into different segments so that you can work strategically with this subdivision.
In principle, you should select the segments that suit your portfolio. The products within such a product group should be as similar as possible in terms of features relevant to purchasing behavior and at the same time differ as far as possible from products in other groups.
Three common criteria are used for segmentation:
- Part type (e.g. spare part, wear part, consumable part)
- Competitive pressure (high competition vs. low competition)
- Failure criticality (What damage does the failure of a part cause?)
These three dimensions can of course be differentiated in detail as desired. However, you should bear in mind that the matrix, which must be filled with pricing logic in the next step, will become increasingly complex as a result. Additional effort must be weighed against additional sales.
The development of intelligent price functions
The correct price function must now be found for each of the parts segments created. The function describes the relationship between spare parts costs and margin mark-up.
The price functions must be defined by spare parts experts and be based on market experience. There are no universal rules for these functions and they must be defined individually for each company and market.
Within a segment, customers are generally less price-sensitive for cheaper parts than for more expensive products. Therefore, within each segment, the cheaper parts should receive higher mark-ups.
Upper limits for pricing
There are limits that should be taken into account when developing price functions. The customer will not accept a 10% surcharge, even for an IP-protected spare part, if the base price is EUR 50,000. With a EUR 5,000 margin, the price will be perceived as unfair. This will cause the customer to look for alternatives. If this is not possible in the case of one part, then it will be possible for other purchases.
It is advisable never to charge more than EUR 2,500 for a part. If the value is higher than this, the customer will quickly get creative and find an alternative supplier.
Manual testing of focus parts
A sales-based ABC analysis should then be carried out. For A-parts, a manual check of whether the price is the right one (also in the context of the competition) is a must. A price function is much better suited than the "Cost+" calculation, as it takes into account a lower price sensitivity for low-cost parts. Nevertheless, it cannot take into account all market conditions for each individual part. Therefore, for really high-turnover parts, it is necessary to check again whether the price is too high or whether further leeway can be used.
If the principle explained is applied sensibly, good list prices can be defined for a spare parts portfolio as a first step. Subsequently, the implementation of the defined prices on the market should be tackled.
