Kris Oldland, Editor-in-Chief, reflects on the recent Copperberg White Paper, Checkmate: Winning Strategies for the Ultimate Aftermarket Pricing Mix, and offers his insights into the key takeaways of this excellent and thought-provoking paper…

Having recently published a paper in partnership with Syncron that explores the need for rethinking our approaches to industrial pricing in the face of ongoing disruption across the manufacturing sector, I’ve had the opportunity to reflect on the most salient points that emerged from this exploration of what is an increasingly important discussion. 

In this brief article I’ll offer my cliff notes on the ten most important takeaways from the paper. 

Embracing Intelligent Pricing in the Industrial Sector:

In the evolving industrial sector, the traditional cost-plus pricing model for spare parts is becoming increasingly inadequate. This model, which adds a markup to the manufacturing cost to ensure a profit margin, fails to consider market dynamics and customer perceptions. As the industry shifts towards everything-as-a-service (XaaS), it’s imperative to adopt more sophisticated pricing strategies to maintain profitability and customer loyalty.

Indeed, from my own discussions with industry leaders and analysts, it’s clear that the reliance on outdated pricing methods is a significant barrier to growth. I have heard more than one anecdote about how a company’s rigid pricing structure has led to losing a key client to a more flexible competitor. This underscores the need for a shift towards more intelligent pricing.

Limitations of the Cost-Plus Model:

To be blunt, the cost-plus model is outdated in today’s competitive environment. 

It focuses solely on production costs and fixed profit margins, ignoring market conditions and customer expectations. This often leads to misaligned prices, resulting in profit leaks and diminished customer satisfaction. As competitors implement more dynamic pricing strategies, sticking to the cost-plus model can render organizations uncompetitive and disconnected from market realities.

In particular, I recall a case study involving a major automotive parts supplier I worked with recently, who struggled with inventory overstock and underpricing issues (something thatis more prevalent an issue than one may imagine). By failing to adapt their pricing to market conditions, they missed out on significant revenue opportunities, and such revenue leakage, in the current market environment needs to be addressed across the board.

Complexities of Spare Parts Pricing:

Pricing spare parts is inherently complex due to the variety of components, differing lifecycles, and unpredictable demand. Factors such as equipment failure rates, maintenance schedules, and technological advancements influence demand, making it challenging to set appropriate prices using traditional models. Moreover, managing global pricing across diverse markets with fluctuating conditions adds another layer of difficulty.

In conversations with supply chain managers, they frequently express frustration over the challenges of setting and adjusting prices for thousands of SKUs. As one spare parts manager explained to me once, “It’s like trying to hit a moving target with one eye closed.”

Effective parts pricing for many years was something of a dark art, but fortunately, we are entering an age where technology can ease a lot of the complexity.