Spare part pricing for OEMs: Insight 2 – Differentiated Cost-Plus Pricing

In Insight 1, I showed why using the same markup factor for all parts creates problems—you underprice valuable components while overpricing commodities. Today, we’ll explore a significantly better approach that many successful OEMs use: Differentiated Cost-Plus Pricing.

🎯 The Core Improvement

Instead of one markup factor for everything, you create different part groups with tailored markup factors. This simple change transforms a flawed method into a more effective pricing strategy that better balances profitability with customer satisfaction.

Here’s an example of how it could work in practice with lawnmower parts:

Here’s an example of how it could work in practice with lawnmower parts:

Notice how the ignition control box gets a 3.0 markup while standard screws only get 1.3. This reflects their different competitive positions and customer value perceptions.

📊 How to Group Your Parts

You can segment parts based on multiple factors, individually or combined. Some examples:

Product characteristics: • Product type: All seals in one group, batteries in another • Complexity/captivity: Standard “off-the-shelf” parts versus proprietary control systems • Sourcing complexity: Parts requiring specialized knowledge versus simple commodity purchases

Competitive positioning: • Price competitiveness: Parts with very competitive purchase costs allow higher markups • Lead-time advantage: Parts you can deliver faster than competitors • Added value: Upgrade parts that extend lifetime, performance, or quality

Key insight: markup should be higher when your part is more competitive, customers are less price-sensitive, and you offer higher value or risk reduction.

🤔 The Customer’s Decision Process

When customers evaluate your pricing, they ask themselves: • Is this part easy to find at public stores or online? • Is it specialized and adjusted to our specific application? • Perhaps it has been replaced by a different part? Would my local shop know that? • Can we get it faster from this OEM than elsewhere? • What happens if we install a “pirate” part—could it damage equipment, reduce performance, jeopardize safety or void warranty?

These questions, individually or combined, determine how customers perceive your price. Different markup factors let you find the sweet spot between profit, volume, and customer satisfaction for each scenario.

✅ Practical Benefits of this pricing method

Operational advantages: • Quick price updates when costs change (just update the cost, maintain the margin) • Scalable across thousands of parts • Fairly simple and predictable pricing and budgeting aspects within each group

Commercial advantages: • Higher profits on high-value, captive parts • Competitive pricing on commodity items • Better customer satisfaction through more rational pricing

⚠️ Important Limitations to Watch

This method requires ongoing attention. Part characteristics change over time: • You switch suppliers and your cost or lead time advantage disappears • New competitors enter with better offerings • Parts become more standardized and lose their captive nature

With thousands of parts across multiple product groups, these changes can be hard to track. This is where systematic approaches become essential—something I’ll address in Insight 8 when I introduce the APP (Adaptive Part Pricing) method, which incorporates differentiated cost-plus as one component of a more comprehensive system.

💡 Why This Matters for OEMs

For OEMs managing extensive spare parts catalogues, differentiated cost-plus pricing offers a pretty good balance: sophisticated enough to capture value differences between parts, yet simple enough to implement and maintain across large product portfolios. While not perfect, it represents a substantial improvement over basic cost-plus and can mostly handle a majority of parts effectively.

💬 Share your thoughts on Linkedin!

How do you currently segment your spare parts for pricing? What challenges have you faced with differentiated approaches? Let’s discuss at https://www.linkedin.com/in/berntgunnarson/

You’re of course also welcome to contact us at bernt@naviro.se or call +46-70 6888288.