Spare Parts Pricing: Tips for Setting Prices in Aftersales Service

Machine buyers take a close look at the overall costs of a machine or plant before deciding on their purchase. Prices that are calculated appropriately benefit not just your buyers, but also your bottom line. On the other hand, setting prices too low will have an impact on earnings, while exacting exorbitant prices will cause you to lose customers.

Pricing is an important lever for sustainable sales growth especially in aftersales and service, because the margins in this segment are especially attractive. But what’s the right way to go about setting prices?
 

The role of service and spare parts pricing in machine construction

The machine and plant construction industry is facing a challenging economic situation. The industry saw a 12 percent drop in orders in 2023, with most decision-makers expecting 2024 to bring a decline in growth. Companies looking to compensate for a lack of orders have to place a stronger focus on the post-purchase experience and make sure their aftersales services are ready for the future.

The sale of spare parts and new revenue models such as pay-per-use give manufacturers the opportunity to boost their sales. A carefully considered pricing strategy is also a must for machine manufacturers who want their aftersales to serve as a reliable generator of turnover.

This lets you make the most of your success potential and give your customers the assurance that they’ve made the right decision by opting for your services. At the same time, you’ll be making sure that third-party providers or suppliers aren’t elbowing you out in the spare parts business, which is fiercely competitive.

Challenges when setting prices in aftersales

Companies that are in the process of their digital transformation are the ones that have the hardest time determining prices for (digital) services due to a lack of experience. When it comes to spare parts, the biggest obstacles in terms of price management are often the sheer number of SKUs and complexity in the market.

Rather than regularly comparing their prices with those of competitors and involving customers in the price setting process, machine and plant manufacturers often use cost-plus pricing with standard markups for spare parts and only adjust prices once a year at most.

The main disadvantage of this is that competitor prices and customers’ needs aren’t taken into account if the sales price is determined solely on the basis of purchase prices and a markup factor. If prices no longer make sense to customers, they lose trust and switch to third-party providers.

What’s more, cost-plus pricing often passes sales advantages on to customers without taking full advantage of the price potential offered by certain spare parts. Machine manufacturers need a pricing strategy in order to prevent this.

What is a pricing strategy, and why does it make sense to have one?

A pricing strategy is a plan for determining the pricing position of spare parts and services with the aim of achieving specific goals - the most important of which are increasing customer satisfaction and maximizing margins and profit contributions.

Your pricing strategy determines the profitability of your sales activities and sales growth. Having a clear strategy for spare parts pricing lets your employees:

• Set valid prices
• Communicate the pricing system in an understandable way
• Price digital services strategically so they can be monetized as pay-per-use or operator models

Prerequisites for spare parts pricing with the market in mind

A pricing strategy requires a holistic service strategy. Manufacturers have to decide:

• Which goals they want their service to achieve over the medium and long term
• Which services they want to monetize
• Which key figures have to be measured
• How to set up service contracts and bundles

They then need to break down their strategy by individual service segments, right through to each individual spare part. This requires large amounts of data - from purchasing and internal spare parts management as well as from sales and marketing.

Tips for spare parts pricing

In addition to cost-plus pricing, machine manufacturers have the option of using value-based pricing for spare parts, which incorporates factors such as the added value for customers and a product’s USPs in the pricing process.

It makes sense to classify all parts so you don’t have to price each spare part individually. This can be done using the following segments, for example:

• Captive spare parts that are only available from your company and offer significant sales potential as a result
• Parts that are moderately critical and complex and are available from other suppliers - but procuring them involves effort
• Standard parts that are also available from third-party suppliers, so they have to be priced in line with the market

Spare parts can be grouped together as families in the segments - such as screws of a similar length. Reference prices should also be used as a guide within the spare parts segments and families of parts.

This creates a pricing logic for the spare parts portfolio as a whole. Ideally, the impact that these price adjustments will have on turnover should be simulated before implementing this logic.

How can we set the best price for services?

Classifying digital services is no easy feat. When setting prices for value-added services and service contracts, you should focus on your customers’ needs and the question of what customers are prepared to pay.

Market studies can be used as a reference here. Data from a company’s own sales organization and conjoint analyses provide even more accurate results, as this market research method lets you analyze the preferences that different customer groups have for specific services and service packages. You can also find out how much customers are willing to pay for your services.

At the same time, it’s important to keep an eye on the competition when setting prices for your services. Pinpoint the advantages your services have to offer and combine standard offers with smart services or custom spare parts packages that customers can only get from you - so you’re offering unbeatable service packages.

What influence do discounts have on pricing?

Discounts are a popular way of keeping customers loyal. But price reductions such as discounts on systems and projects also mean you have less revenue coming in. If you want to offer discounts, you should apply limits and exceptions:

• Exclude premium services from your discounts so they retain their premium status.
• Your discounts should be aligned with the turnover that different customers generate.
• Don’t let your discounts get too granular, or you’ll lose sight of the bigger picture.

Offering bundles is a better way to impress customers looking for lower prices. Equipment as a service is one particular area where it might make sense to put together smart packages that really deliver rather than focusing too much on transparent pricing.

Important: Bundles should always consist of useful, relevant services rather than slow sellers. The most desirable service should go in the most expensive bundle.

Using pricing to drive sales of spare parts and services

A clear pricing strategy can support you when setting prices for spare parts and services. But appropriately calculated prices aren’t enough when it comes to boosting sales. That’s because your customers need transparent access to information on spare parts and services in order to compare prices and opt for your products and services.

Service portals can help you market spare parts and digital value-added services, as they give you a transparent way of communicating your digital offer and all the related prices and advantages. This lets your customers quickly find the spare parts they need, compare prices, and order them on their own. The more transparently you can present spare parts information and prices, the less likely there are to be mistakes in orders.

Solutions by Quanos make it incredibly easy to set up online portals for your aftersales services and let you seamlessly integrate your spare parts catalogs and shop functions. Read our white paper to find out how you can move ahead with digitalizing and marketing your aftersales services and which success strategies are there to support you.