Service parts pricing
This is done with the overarching aim of extracting the maximum possible price from service parts and thus maximize the profit margins.
Service networks deal with a considerably higher number of SKUs and a heterogeneous product portfolio, are more complex, have a sporadic nature of demand AND have minimal response times and strict SLAs.
Companies have traditionally been content with outsourcing the after-sales side of their business and have encouraged third-party parts and service providers in the market.
Increasingly, however, companies are realizing the importance of the after-sales market and its impact on customer retention and loyalty.
Customers are being sold the concept of total cost of ownership (TCO) and are being made to realize that buying from OEMs comes packaged with better distribution channels, shorter response times, better knowledge on products, and ultimately higher product uptime.
Understanding customer needs and expectations, along with the company's internal strengths and weaknesses, goes a long way in designing an effective service part pricing strategy.
The second and complementary reason for taking this approach has been a lack of focus on service parts pricing domain for most companies in the past.
Firstly, costs are not fixed but fluctuate with raw material prices, purchased volumes, supplier contracts etc.
This can cause demand to start being affected by the frequent price changes, and can even push the company into a death spiral.
Recent research also shows that cost based pricing can lead to lower than average profitability.
Low volume parts sold once in a product-lifetime have little effect on profitability but do need a price in the market.
Similarly companies may decide to have leader-follower relationships between their service parts, and may require followers to derive prices from leaders.
Kits are usually sold at a discount to increase volumes and to sell together components that companies think complement each other.
It is also a mechanism to lock customers to OEM parts and not give them many opportunities to explore third party after market vendors.
This may happen due to technological advancements, supplier preferences or plain cost constraints on the raw materials being used.
Companies may also apply overarching rounding rules on their service part prices to give a semblance of consistency.
The rounding rules may vary by geography, product lines, or distribution channel depending on company policies.
Companies seldom round-down their prices and prefer to only round-up which can provide additional, albeit small, margin improvements on the parts.
This could be because the other competitors are insignificant in the particular market or that Honda is taking a strategic decision to chase Toyota service part prices.
A decision to lower service part prices to undercut the market, in general, may signal poor financial decision making from a company On the other hand, effective use of market data to find avenues for price increases is a particularly beneficial strategy.
Companies may also be able to benchmark their customer reach and brand value against their competitors, and use this information in conjunction with the market data to decide how much higher or lower they may price their service parts.
It follows, therefore, that a consumer would buy a product or a service at the market price when it is lower or equal to his WTP.
Over time, however, cellular phones have proved to be an integral part of human race as a whole and most people consider them a necessity.
[3] Estimating a product's economic value to the customer could be a difficult, but an essential, task for a pricing analyst or a marketer.
Value based pricing may also uncover competitive niches for a company and allow them to command higher margins than their peers in the market.
