Achieving high performance with strategic competitive spare parts pricing

Achieving high performance with strategic competitive spare parts pricingIn the current competitive business environment, many original equipment manufacturers (OEMs) are searching for ways in which they can improve growth. Spare parts have always represented an important profit area for OEMs. On average, the spare parts business of manufacturers already makes up approximately ten percent of total sales, up to 50 percent of net income, and significantly impacts customer satisfaction and brand loyalty.

Despite the rich seam that companies have mined to date from their spare parts businesses, many can improve growth and profitability by taking a more strategic, systematic approach to competitive spare parts pricing.

Within manufacturers’ spare parts business units, the competitive parts segment generally constitutes more than 50 percent of parts sales and is the main focus of parts pricing managers. Many OEMs are failing to seize upon growth opportunities and efficiencies that will enable them to expand their competitive spare parts business and make it more profitable. Much of this is down to the significant challenges pricing teams face, including lack of scope and manpower.

Few resources to cover a wide range of parts: While finished goods often have many times more employees and budget to work on pricing for a small number of products, spare parts often have few employees and little budget to work out pricing for many thousands of parts (see Figure 1). Given the large numbers of parts, most spare parts pricing organizations will only focus on the top ten percent of parts because they do not have the time to work on pricing the other 90 percent. This can cause inconsistent pricing over the entire lifecycle of the product, which can have a long-term impact on profitability.

Limited benchmark information: Given the lean teams and limited resources, manufacturers often lack the manpower, processes, and tools to identify and track competitor benchmarking information

across the full portfolio of spare parts consistently and continually.

Fear of losing market share: Once the market becomes competitive for a spare part, many competitors will undercut OEM prices. Many manufacturers fear that if they change the spare part price once it moves from the captive phase to the competitive phase, then they will lose market share. However, customers, particularly repairers, may not use price as the primary purchase criterion.

Despite these hurdles, Accenture believes that many companies can unlock value and improve margins by taking a more strategic, systematic approach to competitive spare parts pricing across the entire portfolio of parts.

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Competitive pricing in the spare parts life cycle

With the exception of highly competitive spare parts (e.g. consumables and accessories), the item price is not always the primary purchase criterion for OEM customers, whether the end consumer or repairer, who take other factors into account, such as part availability, delivery time, reliability, and the company’s reputation. In a strategic competitive parts pricing approach, an OEM’s natural strengths, such as client services, documentation, technical support, logistics, and kitting can offer a competitive advantage that should be factored into the part’s optimal price.

Figure 1: Imbalance between pricing for finished goods versus spare parts

Finished goods

• 30–100 products

• Sales & marketing budget

∾∾∾∾$20–50 million

• ∾20–50 FTE (full-time

employees) for pricing

Spare parts

• 50,000 - 500,000 part

• Aftermarket budget ∾$1–4 million

• ∾1–20 FTE (full-time employees)

for pricing

Focus of

typical OEM

To help companies reap the maximum profit from their competitive parts business, Accenture proposes an industrialized and agile methodology to determine the part’s price based on its life cycle stage, perceived value, and market intelligence.

In general, a competitive part passes through two different pricing stages during its life cycle (see Figure 2).

1. Captive pricingPrice leader: As leader, the OEM sets the price During this phase, most competitors will follow the price set by the manufacturer. The low level of competition enables the OEM to optimize prices

according to the customer-perceived value of a given part. In their Parts Analysis centre, Accenture experts examine the parts to collect the characteristics with an impact on customer price perception. Leveraging a rules-based pricing tool, they propose a pricing model that values functional and technical characteristics of each part. This approach looks at the product characteristics including dimension, material, weight, technology used, added value, specific functions, manufacturing complexity, and finished value, among others, to optimize price.

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Figure 2: Competitive spare part life cycle

1 2 1

1

2

Captive pricing

Competitive pricing

Price leader Competition phase Phase out

Evolution of OEM volumes

Evolution of competitiveness

Evolution of pricing rules

Phase out: Reaching product obsolescence, OEM resumes dominant market positionDuring the Phase out stage, many competitors will no longer stay in the market due to reduced sales quantities as the finished good approaches obsolescence. At this point, the OEM can resume its captive pricing approach based on perceived value.

2. Competitive pricingCompetition phase: Be agile, adapt to the markets During this phase of intense competition from major players, manufacturers can see their market share plummet. Many OEMs face difficulties in tracking the competitor benchmarking information over the entire range of parts. In this phase, it is important for OEMs to focus on gathering market intelligence and analysis through industrialized methodologies, processes, and tools to maintain an agile position in a constantly changing competitive market. Accenture has developed a systematic approach to analyzing market price per country per part reference, which empowers our clients to master price positioning effectively.

Aligning competitive prices with market expectations

With market prices shifting continually, OEMs need to stay abreast of the full range of key benchmark data to ensure that their spare parts are best-placed in the market. Accenture’s approach for the competitive phase focuses on market intelligence analysis and adaptability to help OEMs achieve high performance. The systematic approach, using specific methodologies, processes, IT, and a pool of Accenture experts, concentrates on three key areas:

Competitor segmentation At the beginning of the evaluation, it is necessary to look at the full range of competitors over a number of dimensions: product family, geography, parts coverage versus OEM product portfolio, price, revenues, etc. The evaluating team assigns threat levels to competitors to narrow down the key benchmark group to a limited level of competitors, looking at the most appropriate criteria in each family.

For an example of a market intelligence pricing analysis, see Figure 3.

Technical and market intelligence per country, per part Once the comparative data set of close competitors is narrowed down, experts create and maintain an

accurate brand value positioning framework at the family level and update it regularly. OEM items are also analyzed in Accenture Parts Analysis laboratories. Accenture experts then create a clean technical segmentation of competitive subfamilies before beginning market price analysis.

Market price analysis For each market, the team of experts simulates the impact of OEM brand value positioning versus the average market price of competitors selected per family. Using Accenture proprietary assets, OEMs can efficiently deploy a regional competitive pricing strategy for each specific market. Accenture assets then keep pricing teams informed of any market price changes that could impact OEM profitability.

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Figure 3: Competitive spare parts analysis example: timing belt

Part Length (cm)

Width(cm)

Added value Engine Life cycle Perceived value pub lic price

OEM current pub lic price

Market public price*

Brand valueOEM price/market price

Recommended price

116 2.5 1 tensioner 1.5 diesel Competition $133.65 $133.65 $120.51 +6%+11% $127.74

ä

126 2.4 1 tensioner 1.9 diesel Competition $137.44 $113.10 $106.77 +6%+6% $113.10

ä

125 2.6 1+1 tensioner 1.4 diesel Competition $162.29 $145.00 $157.09 +6%–8% $166.52

ä

130 2.4 3+1 tensioner 1.9 diesel Leader $188.00 $150.00 - Perceived value

- $188.00

ä

108 2.2 2+1 tensioner 3.0 diesel Phase Out $193.14 $285.00 $285.00 Perceived value

+9% $193.14

ä

* Market price: weighted average of OES competitor prices.

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Accenture can help OEMs on their journey to optimize prices by providing long-term business services and by integrating its innovative approach with the company’s pricing processes and legacy systems.

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Achieving a robust and agile competitive pricing framework

Accenture’s industrial spare parts pricing approach can minimize manufacturers’ time and effort and is strongly results-oriented. Accenture experience suggests that clients achieve three percent to ten percent incremental gains for the optimized scope. Facilitated by a transparent communication program, the competitive spare parts pricing approach also:

• Develops a robust and agile competitive pricingframework that can be easily adapted at scale totackle large volumes of parts across their lifecycles and many markets

• Establishes the market intelligence data set as apermanent asset for the OEM to retain

• Creates a win-win situation betweenmanufacturers and their clients by deliveringgreater price consistency and reliability

• Improves brand image and customer satisfaction,leading to improved customer loyalty

With a dedicated pool of spare parts pricing experts, proprietary technology, processes and methodologies, Accenture is well-placed to help its clients achieve high performance in competitive spare parts pricing. With a robust and agile competitive pricing framework, OEMs will be well-placed to seize market share for key spare parts while achieving the best margins across the scope of their parts portfolios.

Interested in learning more?

For more information on how Accenture can help your company achieve high performance competitive spare parts pricing, please contact:

contactAPLMS@accenture.comłwww.accenture.com/APLMS

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About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with approximately 275,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013.

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