How Aftermarket Parts Companies Can Implement Dynamic Pricing 🏍

Aftermarket parts pricing in the Industrial Equipment Industry could be a gold mine for manufacturers and distributors alike. Price optimisation, in particular, has really turned out to be a successful way for aftermarket distributors to maximise margins without sacrificing volume across thousands of part prices.  One report across 30 industries, for example, shows that the average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services is 25 per cent, compared to 10 per cent for new equipment. Little wonder aftermarket distributors are keen to update their price optimisation models to include dynamic pricing for aftermarket parts too. The question is, how to implement dynamic pricing?

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The problem is though, integrating dynamic pricing in price optimisation models to drive profitability in the aftermarket industry is no easy task: Firstly, there are many aftermarket parts to prices to get right – c.40,000 items is not uncommon – and data is often bad. There are also lots of regulations and rules to abide by. Finally, now more than ever, an increasing number of new entrants are entering the market. Many are also experienced in digital and are unafraid to use lowball parts and service prices to win market share from more traditional aftermarket manufacturers and distributors. 

In this article, we will continue to discuss how to implement dynamic pricing in aftermarket parts. Including what it is? Followed by an evaluation of dynamic pricing in relation to the aftermarket parts distribution model. 

We will argue that dynamic pricing in the aftermarket distribution model is good in theory but requires a lot of work. We strongly believe that for incumbent manufacturers and distributors to move to a dynamic pricing aftermarkets model, requires building and embedding commercial capability first – not necessarily leaping to eCommerce as a ‘catch all’ solution. 

How To Implement Dynamic Pricing And Marketing In The Aftermarket Industry

Dynamic pricing optimisation models basically set starting prices for aftermarket products and services based on historical market demands – AI drives dynamic pricing optimisation models also seek to set starting product prices based on real-time demand too (discussed below in more detail).

Dynamic pricing in the aftermarket industry is founded on a pricing algorithm that is in turn aligned to a business’s pricing strategy. The most common price algorithms we see are typically aligned to demand, competition and cost pricing strategies. Very few indeed are based on value pricing strategies.  

Dynamic pricing algorithms typically operate with massive quantities of after-part pricing data. There are several kinds of algorithms in this industry. The most common are traditional algorithms. These are pre-programmed rule-based algorithms that run multiple if/then rules to determine key prices based on the available variables and data inputs. 

There are machine learning price algorithms; albeit less commonly used. Machine learning algorithms are complex predictive models that churn real-time output based on pre-populated and agreed input data and metrics. 

In essence, machine learning price algorithms or AI dynamic pricing teach themselves about aftermarket pricing and market dynamics over time. They in turn offer predictions based on multiple statistical probability levels in the areas of sales, price, revenue, and profit. 

It can take a machine over 10 years to really understand the market and dedicated pricing and data teams to regularly check and update input data sources for automation and predictions to be useful. 

Advantages And Disadvantages Of Dynamic Pricing And Marketing In The Aftermarket Parts Industry

For the longest time, dynamic pricing was not associated with the aftermarket. But that is about to change, as parts retailers begin to implement real-time, automated, multivariate pricing throughout their platforms. The prevailing inflation, as well as recent supply chain issues, hastened the process. 

The advantages of dynamic pricing are evident. It can benefit both the buyer and the seller.

Price movements do not follow a fixed structure. Dynamic pricing adjusts prices for a specific product based on customer demand, lead times, and manufacturing capability. Moreover, it enables sales teams to develop automated selling systems based on previous successes and failures, as well as present and future market conditions. 

All of this means that businesses can maximise profits in ways that traditional price methods, such as cost-plus, cannot.

Nonetheless, dynamic pricing can be tricky. If you get it wrong, you risk upsetting customers due to actual or perceived price gouging, as in the case of Springsteen and Ticketmaster. Worse, you risk losing revenue by possibly pricing down a product and underselling your offer.

The problem is, though, aftermarket parts have fairly poor data, segmentation and market insights. If aftermarket retailers are really serious about dynamic pricing, they need to move beyond balancing supply and demand and improve their data, analytics, people, structures and systems too. They have to also ensure price changes that are produced from dynamic pricing systems meet regulations. 

All of this involves more than just a simple dynamic pricing system. It requires building and embedding internal commercial capability and processes for generating, analysing, and utilising multiple data sources to drive optimal customer pricing. Without the right level of commercial capability, then, dynamic pricing might be a recipe for disaster for aftermarket parts retailing. 

Discussion On How To Implement Dynamic Pricing Methods And Management

How to implement dynamic pricing to 40,000 SKU line items properly? 

You need a well thought through pricing framework before you implement dynamic pricing successfully in the aftermarket industry.

A distribution aftermarket pricing framework should look something like this. Firstly, it covers in detail core pricing capabilities plus explanations and a clear rationale for each capability. These capabilities include:  Price execution, pricing strategy, organisational alignment and governance, price setting, pricing technology and data management, and regulatory effectiveness.

The value of a documented and holistic pricing framework like this is that it enables leaders and their teams to regulate, audit and sense check price strategy and foundational price structures against defined pricing policies and operational processes. It also enables faster and better decision making and detects early warning signs and problems in price logic before they present a significant legal problem.

Price discipline and control of systems, people and cultural dimensions are, then, key to maintaining an effective dynamic pricing system in aftermarket distribution. Even though most still believe data, analytics and fancy systems are the silver bullet solution to override an effective pricing framework. It is highly recommended to consider carefully your pricing framework before implementing dynamic pricing in the aftermarket distribution industry.

Is it worth improving aftermarket pricing if new entrants with strong IT and digital capabilities have moved in already? 

Yes. Striving for price improvement is a great way to get ahead of competition.

However, to remain really competitive in this industry, consider a thorough review of the lifetime value of your core offers first before you implement a dynamic pricing system — i.e., this is the total revenue you receive from servicing your installed base of products and services. This measure, which is typically calculated for each product line, often provides a comprehensive view of your true aftermarket value over and above metrics like service revenue per customer. Many distributors underplay or do not consider this analysis at a granular line item level. Focusing on the right products and prices often yields higher returns in investment that a scattergun pricing approach across a large portfolio. 

Then, once you know where you stand with your core offer, consider improving your value pricing capability. We say this because understanding your customers’ relative willingness to spend money on parts and services enables you to identify why they value these core parts and services. Knowing why your customers value your products is an essential and non-negotiable element of devising an accurate price model to charge them. In other words, there are many steps to ensure you set the optimal price point, before simply launching a dynamic pricing system.  Don’t forget the most important parts: your customers, competitors and your core offer / strength. 

Can we implement dynamic pricing when there are strict regulations?  

Yes. But do the regulations make this easy? Not really.

The Australian Competition and Consumer Commission (ACCC) has always emphasised its support for healthy business competition, and the aftermarket industry is no exception.

However, it is important to note here, that the aftermarkets industry operates within an ever-changing regulatory environment, which can and do often drive product substitution in the aftermarket industry. This means product quality may be impacted and more sub-standard products will appear on the market. 

Implications

For dynamic pricing to work in the aftermarkets industry to work well the following must happen:

• Greater focus, discipline and understanding of core offers and pricing. Know your strengths and the $ value of your offers. 
• Clear insights into how, what and why customers buy from you.
• Clean and usability data and multiple data sources
• Dedicated pricing teams to oversee and tweak price optimisation on an ongoing basis.
• Additional data and IT infrastructure to implement and run dynamic pricing effectively in an eccommerce platform.
• Commercial capability building for your teams to drive better outcomes.

In fact, our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, they can generate at least 3 – 10 percent additional margin each year while protecting hard earned revenue and volume. This is at least 30 – 60 percent profit improvement straight to the bottom line.

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Bottomline:

In conclusion, existing industrial parts distributors should resist prioritising ecommerce and AI driven dynamic pricing and data-driven services and instead focus attention on improving their core aftermarket offer and pricing first. In other words, fix the structural foundations first before adding the enhancements and improvements. This is where you’ll get the most $ value and this is where you’ll fix the most margin leakage. 

For a comprehensive view on maximising growth in your company,

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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

Make your pricing world-class!