Spare part pricing for OEMs: Insight 4 – Market-based Pricing

After discussing cost-plus and consistency pricing in insights 1-3, let’s consider another method for setting price: By the Market. This method is often used stand-alone to set prices, but can also be used as complement to other methods, in order to verify and fine-tune pricing done in other ways.

🎯 The Core

This method means that you need to price your part based on the prices offered by other vendors and perhaps head-to-head competitors. You may choose to position yourself a bit higher or lower, but either way you must relate to market prices and follow any changes. This might be the most work-intensive and dynamic pricing method around, as market prices may change frequently.

With this method, your actual cost is not part of the sales price calculation, as it is for cost-plus pricing. Instead you monitor market-prices closely and adjust your sales prices accordingly. In extreme conditions, daily or weekly changes are made.

Market-based pricing of spare parts is most used for standard parts (e.g. off shelf products) but can also be applied to non-standard parts where competition is still fierce and customers regularly shop around for the best deal (e.g. exhaust systems for cars).

📊 Market Pricing of Standard Parts

You could use market-based pricing for any standard part that is also offered by others. However, for very common parts like standard screws and nuts, there are a huge number of manufacturers and vendors. And for most OEMs these parts are not generating significant revenue or profit, they are rather “must have” parts to offer customers a one-stop-shop. Combined with the fact that you may sell 100’s or 1000’s of different standard parts, it could require a huge effort to price them individually based on competition.

Let’s look at 2 ways to deal with this:

• Approach 1: Market benchmarking. Try to match average and/or typical market prices, or set prices a certain % higher or lower than them. You may benchmark against leading part providers or key competitors. Sure, some vendors may be higher or lower in price, but at least you’re not way off market prices. Your own cost is not part of the calculation. For that reason, margins need to be monitored to see that they are acceptable, at least in average and over time (if they make up a small part of your revenues).

• Approach 2: Hybrid method. Base sales prices on costs × markup factor, but set the factor based on market prices (market price ÷ your cost = markup factor). For example, if market price is €150 and your cost is €100, your markup factor becomes 1.5. The factor may also be adjusted up or down to offer prices slightly above or below market prices. The factor may differ between each article or mor often between larger article groups. So this approach is a combination of market-based pricing and the pricing method described in insight 2, differentiated cost plus.

📊 Market Pricing of Non-Standard Parts

Market-based pricing can be suitable also for your non-standard parts, even if you’re the only source of the original part. This is when alternative parts are offered by others (either almost identical or at least interchangeable). Market prices are most relevant when your customers are prepared to “take the chance” and buy a lower-cost alternative as they consider the technical and commercial risk as small or neglible.

As an example, a car manufacturer may price OEM exhaust systems based on what “pirate” suppliers offer, plus an OEM brand premium (due to brand strength, higher quality, better fit, intact warranty, better availability and so on). In these cases, the production cost is not at all the price base.

What makes things complicated is that the “pirate” part suppliers may base their prices on the OEM supplier—typically with a certain price reduction. This creates a circular pricing dynamic where OEM prices influence aftermarket prices, which then influence OEM pricing decisions.

This is why market prices may change often for these types of parts. Advanced players in this sector leverage pricing software that automatically tracks competitive prices in real-time

⚠️ But what if market prices push my margins below acceptable?

If your margin ends up too low on some products, there is not much you can do about it short-term if you want to see good volumes and decent customer satisfaction. The “market” pretty much sets the price, especially for standard parts. Instead, you should try to lower purchase costs. 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 direct market price comparisons. Examples of differentiation actions could be to create sets, change the design slightly, sell it in different quantities or other “disguise” maneuvers.

If market prices push your margins below what is acceptable, it is also a sign of your cost being non-competitive. It could be related to design specifications, supply chain issues or other factors that need to be investigated.

💡 Conclusion

Market-Based Pricing is a very common and well proven method for B2C products, and almost as common for B2B products. It is not as common for spare parts, although some industries like automotive use it extensively.

Common or not, you should at least consider it and decide if you need to apply it to all, some or none of your parts. If not, you may in the best case underprice your parts, but in the worst case overprice them resulting in lost orders and/or lost customer trust in your pricing. And ultimately, inviting a competitor to “your” business and customers.

The key is understanding when market forces truly drive customer decisions versus when other factors (convenience, risk, brand trust) allow for different pricing approaches.

💬 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.