Pricing Management FAQ
Q: What is Service Parts Price Management?
Q: What makes Service Parts Pricing so unique and difficult?
Q: How do most companies price service parts?
Q: Why is Service Parts Pricing important?
Q: Do companies employing best practices in Service Parts Pricing outperform those using cost-plus?
Q: How is Service Parts Pricing different from retail pricing?
Q: Do customers view the use of pricing optimization solutions as unfair?
Q: Is pricing optimization used only to increase prices?
Q: Do all service parts have the same price sensitivity?
Q: What are the measurable benefits of Service Parts Pricing optimization?
Q: How has the Servigistics pricing solution delivered measurable results to clients?
Q: What is the difference between Service Parts Planning and Service Parts Pricing?
Q: How long has Servigistics offered Service Parts Pricing solutions?
Q: What is Service Parts Price Management?
Service Parts Price management is a critical component of Service Lifecycle Management (SLM). It is best defined as the practice of maximizing revenues and profits through the optimization of prices for service parts. Service Parts Price Management is the practice of monitoring the measurement of price elasticity for each discrete part to determine the one price that maximizes gross profit. In addition to driving profit margins, this approach enables companies to solidify customer relationships and successfully compete against other part sources. Leading companies around the world are realizing how they can deliver tremendous revenue and profit improvement by blending traditional “cost-plus” with price alignment, market-based pricing and price optimization techniques.
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Q: What makes Service Parts Pricing so unique and difficult?
One factor that makes Service Parts Pricing difficult is complexity and sheer volume. At most companies, there are usually a large number of unique, highly diverse service parts to be tracked, managed and priced. There are also complex market dynamics frequently associated with each part. This includes a mixed competitive environment, highly complex and fragmented channels of distribution and numerous market segments in which parts are offered.
Service parts play a secondary, supporting role to whole goods such as passenger cars, trucks, computers, and appliances which has critical implications for pricing: overhead burdens, resource limitations and other constraints imposed by independent suppliers of service parts. These constraints place whole-goods manufacturers in many capital and consumer goods industries at a competitive disadvantage. It is therefore critical that technology solutions be employed to capture data inputs—such as part demand trends, part characteristics that drive segmentation and competitive price points in all markets — while actively managing this volume and complexity of parts.
Part grouping also adds complexity in pricing service parts. Different service part categories, families and other groupings can differ in how they contribute to overall service profitability, which requires the application of different techniques available in pricing service parts to achieve maximum performance in all part groups and balance overall revenues and profits across groups. These techniques include price alignment, market-based pricing and price optimization.
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Q: How do most companies price service parts?
While an increasing number of companies use market-adaptive pricing to maximize revenues and profits, most fall back on manageable “cost-plus” models for pricing many service part categories. Cost-plus pricing methodologies derive part prices with standard percentage markups from the part purchase price or manufacturing cost. This technique fails to consider market conditions such as competitive or comparable parts prices, or what customers are willing to pay for each part. For this reason, cost-plus pricing frequently leads to lost revenue and margin, customer dissatisfaction, increased competition, and lost market share.
Nearly half of the companies surveyed as part of a recent study conducted by AberdeenGroup rely too much on cost-plus pricing tactics for their service parts; another 20% are worse off, lacking any systematic approach to part pricing at all.
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Q: Why is Service Parts Pricing important?
Corporate revenue, profits and customer loyalty are increasingly being addressed by the service delivered after the sale of the product. As a result, companies around the world are examining their service businesses in search of opportunities to positively impact corporate performance. Many of these companies have significantly increased revenue and profits by optimizing Service Parts Pricing. Servigistics clients have successfully used the Servigistics Service Parts Pricing solution to drive up service parts revenues by as much as 10% in key parts segments, while increasing total gross profit by as much as 16%. With post-sale service and parts accounting for 20% - 30% of revenue, and as much as 40% of profits, Service Parts Pricing is an opportunity that should not be overlooked.
In a recent study conducted by AberdeenGroup, 83% of companies reported that effective Service Parts Pricing is important or extremely important to the financial health of their companies. However, less than 20% of surveyed companies are confident that their current Service Parts Pricing methodology is maximizing service parts revenue and gross profits
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Q: Do companies employing best practices in Service Parts Pricing outperform those using cost-plus?
A recent report published by AberdeenGroup suggested they do. According to their study:
“Taken as a whole, best-in-class companies — those that scored higher on average across five maturity categories: Service Parts Pricing process, organizational structure, part data visibility and management, technology support, and performance measurement — outperformed companies that exhibited average and laggard characteristics in the critical areas of service part revenue growth and service parts profit improvements.”
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Q: How is Service Parts Pricing different from retail pricing?
Pricing service parts is very different from pricing other items, such as consumer goods, airline seats or furniture. When pricing service parts, many unique attributes, constraints and objectives must be considered. For example, if a customer is in need of a critical part for a mission-critical machine, they’ll be less likely to price shop, which should impact how the part is priced. Additionally, the age and lifecycle of the machine must be considered when pricing the part, as the price of the part might impact opportunities to generate other part sales or labor revenue. The location and lead-time are other factors that need be considered as well.
“Companies that approach Service Parts Pricing in the same way they approach retail pricing are running into challenges. Supply, demand, and competitive dynamics in the service parts market differ greatly from those in the original product supply chain, so retail pricing strategies and solution miss the mark for pricing parts” AberdeenGroup
The chart below highlights some of the fundamental differences between retail pricing and Service Parts Pricing
| Retail Pricing | Service Parts Pricing |
|
Sales to consumers: optimizing only the store price. |
Mix of channels — including distributors, dealers, wholesale, and consumer channels — make pricing decisions more difficult. |
| Optimizing the price on the PRIMARY good sold to consumers; can be influenced by merchandising, store placement, and promotions. | Service parts have secondary, supporting role to “whole product” sales. Cost of operations must be kept reasonable to avoid impact of repeat product sales. Service merchandising is effective; parts merchandising is generally not. |
| Multiple consumer segments with different importance and price sensitivities. | True here, too. Dealer-installed service generally has low price sensitivity. Dealer wholesale channel is very high. Easy to differentiate by the model line each part fits. Price walks are used. |
| Merchandise has limited shelf life. Markdown optimization (when and by how much) is a requirement. | Service parts generally do not have a limited shelf life. However, service parts do have a cost associated with stocking, including obsolescence. |
| Higher volumes driven by retail operations can more easily calculate price elasticity. | Lower volumes from service parts often require the use of competitive and “comparable” data, such as comparing a Camry bumper to an Accord bumper. |
| Demand curve is one of exponential decay: as prices get lower, customer volume goes up dramatically. | Demand curve is sigmoid in shape. Reducing price cannot increase the number of parts that fail. |
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Q: Do customers view the use of pricing optimization solutions as unfair?
No. In fact, market studies have consistently shown that cost-plus pricing models appear “arbitrary” to most customers, causing some parts to be priced too low, while others are priced too high. By using market-adapted pricing techniques, pricing optimization will deliver pricing strategies that are rational to your market and customer base.
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Q: Is pricing optimization used only to increase prices?
No, price optimization and price elasticity determination helps companies determine the “best” price for each part based on market strategy, customer sensitivity to prices, cost of stocking and competitive price points. Pricing optimization may raise or lower the price points of individual parts, with the objective of maximizing total profit for OEMs and suppliers. For example, a price reduction can potentially drive dramatic volume gains, resulting in higher overall volume and higher total profit.
Other service part pricing techniques need to be used in conjunction with service-specific elasticity calculations to achieve part or segment-specific pricing strategies. These include part price alignment based on part kitting; part chaining; desired depletion rates and burn-off of excess inventory; and market-based pricing using competitive and comparable price points.
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Q: Do all service parts have the same price sensitivity?
No, service parts are not commodities, and there is no single market price for comparable parts. In any group of competing parts, there will be parts with prices throughout the market range. The objective is to take a position on every part that will enable you to maximize total profitability.
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Q: What are the measurable benefits of Service Parts Pricing optimization?
More than 30 leading automotive and high-tech companies have used Servigistics pricing solutions to:
- Increase service parts gross profit by 5 - 20% in selected part categories
- Increase service parts revenue by 2 - 10% in selected part categories
- React faster to market changes
- Coordinate pricing decisions at different echelons in the business
- Gain visibility into trends and local markets worldwide
- Improve customer satisfaction
- Increase productivity
- Increase negotiating leverage from suppliers
Recent research conducted by AberdeenGroup indicates that companies leveraging Service Parts Pricing applications, market price databases and other service parts solutions are seeing both top- and bottom-line improvements that dwarf those of companies using outdated productivity tools.
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Q: How has the Servigistics pricing solution delivered measurable results to clients?
As an example, when a Japanese automotive manufacturer wanted to capitalize on the revenue and profitability opportunities associated with Service Parts Pricing optimization, they turned to Servigistics for assistance. The following case study outlines the problems, solution and results related to the implementation of the Servigistics Pricing solution:
Problems
Solution
- Manually maintaining market data and analyzing information for 2,000 critical parts
- No visibility into competitive or comparable prices for service parts
- Inability to set optimal prices for service parts
- No coordination between repair and maintenance pricing
Results
- Maintain market prices for all critical client service parts
- Update comparisons and share results three times a year
- Set optimal price points with market data and demand elasticity
- $15 million in incremental annual additional revenue
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Q: What is the difference between Service Parts Planning and Service Parts Pricing?
While service parts planning and Service Parts Pricing are both critical components of Service Lifecycle Management (SLM), they represent uniquely different service business processes. Service Part Pricing is the process of setting the right price for the part to ensure maximum revenue and profitability. This differs from Service Parts Planning, which is the process of ensuring the right part gets to the right place at the right time. Servigistics delivers maximum value by enabling clients to integrate their service parts planning, pricing and workforce management processes into a single, fully integrated, cohesive system. Servigistics provides the network-wide service visibility and control needed to efficiently and effectively manage the service business. The integration of service parts planning and pricing illustrates how Servigistics delivers increased value. Tactically, Service Parts Pricing needs to consider inventory levels to prevent situations such as holding price for a part that is critically short. Strategically, pricing can be used to drive service part forecast accuracy and achieve desired inventory plans.
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Q: How long has Servigistics offered Service Parts Pricing solutions?
Servigistics has a proven track record of delivering industry-leading service parts management software. The company complemented these capabilities in April 2004 with the acquisition of ProfitScience, the leading provider of Service Parts Pricing optimization software and services. For more than 10 years, ProfitScience has delivered significant results through improved Service Parts Pricing for dozens of Fortune 200 companies. These industry-leading clients benefit from a solution that combines market research pricing data, powerful pricing optimization software and deep pricing expertise.
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