Spare part pricing for OEMs: Insight 1 – Basic Cost-Plus pricing

In this series of 10 pricing insights, I will discuss the most common pricing strategies used for spare parts sold by OEMs, one at a time. I will cover both basic and more advanced strategies and suggest how you can select what is better for your specific situation.

I will actually exclude one pricing method—the simplest one, which is setting the same sales price for all parts, regardless of their cost, competitiveness, and perceived customer value. This approach is far too simple and rarely works well in practice. So, let’s move on to the second easiest.

What is Basic Cost-Plus Pricing ?

It means that the seller bases all sales prices on the purchase or manufacturing cost of the parts, multiplied by a fixed factor. For instance, if the markup is 2.0, a part bought for €100 will be priced at €200. The profit is €100, and the gross margin is 50%.

In its simplest form, the same markup is used for all parts, regardless of type or value. This method is practical because part costs often fluctuate. By updating the cost, new sales prices are quickly generated, and margins are maintained. For OEMs managing tens of thousands of parts, this makes pricing fast, predictable, and time-efficient.

There’s no doubt the method is easy to use. It simplifies price lists, quotations, budgets, and allows for straightforward sales and profit calculations across customers or segments.

Draw-backs

Simplicity comes at a cost—and often a high one. Most parts will not be priced optimally. Many will be sold too cheaply, leaving profits unharvested. Others will be overpriced relative to customer expectations, leading to lost sales or strained relationships.

Consider these two examples, assuming a fixed markup of 2.0:

• A standard roller bearing sourced from a general hardware vendor costs €100. Your sales price becomes €200. But your customer, with a procurement agreement with the same vendor, pays only €66. Your price appears almost three times higher, even though your markup is 2.0. The result: lost credibility and likely lost sales.
• A proprietary gearbox, unique to your machines, costs €2000. You price it at €4000. The customer sees it as a bargain, given its performance and irreplaceability. They would likely pay more. The result: missed profit opportunity.

Although this strategy is still used by some companies, I rarely recommend it—unless spare part sales are insignificant and customers are indifferent to pricing. If that’s the case, you’re probably not reading this insight anyway. In most cases, better pricing methods exist that strike a smarter balance between profitability and customer satisfaction.

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