Spare part pricing for OEMs: Insight 3 – Consistency-Based Pricing

After discussing cost-plus pricing in insight 1&2, let’s consider another method for setting price: By Consistency.

This method is mostly used as a complement to other methods, although it can be used stands-alone as well.

🎯 The Core

This method focuses solely on pricing parts in such a way that parts with similar characteristics have similar prices. Prices should be logical in the eyes of a customer. For instance, a 1 meter rubber hose is expected to be cheaper than a 2 meter hose, otherwise identical. If not, a feeling of unfair or unreliable pricing may surface, and customer may start to compare other parts and other suppliers. Something that may end up very costly for you, potentially loosing all their business

🎯 Further details

Let me give you 3 examples of what consistency means:

Example A: The same M10 standard screw but with 100 and 110 mm lengths should have a similar price (110 mm probably slightly higher), provided they are both standard dimensions and readily available.

Example B: A drum with 200 meters of a certain rubber seal should have similar or lower price per meter, than the same seal on a drum with 150 meters.

Example C: A standard electric motor for your Advanced Machine should have similar part price as when it is used for your Standard Machine. Even if the part number is different. A customer may buy parts for several of your products and should not find major price differences between them (if the part is or seems to be identical). Increasing mark-up of standard parts solely based on a high-end application is risky.

The philosophy of this method is to keep the prices similar (but not necessarily identical) for similar parts, even if the actual cost is a bit different. Your part cost depends on many factors, such as purchase volumes. It could well be that the 2 screws mentioned in example A above, even if almost identical, have quite different costs (maybe you buy one of them in lots of 10, the other in lots of 10000).  But it is likely that customers don’t see that and are not willing to accept very large price differences. You may need to consider using different mark-ups (and thus margins) for these screws to even out the difference.

🎯 Can this method be used stand-alone?

This method does not tell you what mark-up to use, only to be consistent. It should therefore be combined with other pricing methods. I believe consistency must always be considered, no matter how you price parts. Consistency is, in my experience, often neglected. Neglect of consistency can be the reason for inviting a competitor to bid for a part when a customer suspects you are not competitive, or that your mark-up is far too high. Ands once a competitor get into your business stream, they may be hungry or more.

🎯 But what if my margins become low or even negative?

If your margin ends up too low on some products, you should rather try to lower purchase costs than accept inconsistency, since the sales price is pretty much set by the other similar products. Can you find another supplier? Buy larger volumes? Or change specifications?

Alternatively or combined, you could try to differentiate the part, in order to avoid consistency comparisons. Examples of differentiation actions could be to only sell it together with other parts (sets), change the design slightly, sell it in different quantities or other “disguise” manoeuvres.

The consistency perspective is incorporated in the APP (Adaptive Part Pricing), covered in Insight 8. So, all is under control, so far!

🎯 Bonus effect: Shaper procurement

If you find inconsistency between 2 similar products, it may be due to ineffective procurement. You might use different suppliers for similar items. You might use very old price agreements, made up when conditions where different. You might by both parts form the same supplier, while it would actually be much better to use 2 suppliers since your existing on is weak on one the articles (maybe outside there normal scope).

There can be other reasons, some may be eliminated, some not. The point is, when using consistency pricing, these difference surfaces and you can take actions. Without a consistency check, changes are they will not be discovered.

💡 Why This Matters for OEMs

Non consistent pricing may be the entry ticket for your competitors, potentially loosing big business. An even if not, you may still  lower customer confidence in your pricing.  Which is never a good thing.

Is it enough to check consistency for the best selling or most expensive parts?

Not really! For OEMs managing extensive spare parts catalogues, perhaps with ten thousands of parts, it is tenmpting to focus on the top selling / top value parts. In fact, some pricing experts suggest to apply a Pareto 80/20 approach and use a simple pricing approach to the  the low impact parts For instance, a fixed mark-up.

But customers don’t care how much you sell of a certain part. They just compare the part your quoted. If doubts are raised, your exposed to business risks. And conditions changes: -that cheap rubber hose, so far only bought once /year by your largest customer, might suddenly be needed in big volumes and the price will be scrutinized.  Don’t take that risk.

💬 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.