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A fast way to higher profits

Optimizing spare par ts pricing

Dallas , May 8th

Peter HarmsSenior Director

Boston office

One C anal P arkC ambridge, MA 02141US ATel. +1 617 231 4500 P [email protected]

Pricing strategy

Source: Simon-Kucher

Top pricing challenges in the spare par ts business

Optimizing spare parts pricing

Price image

Central list prices Trade conditionsMarket list prices

1

2 3 4

5

One more challenge

Pricing infrastructure: First optimize process

then organization & systems 2

Source: Simon-K ucher

What we of ten see: Ambiguity of targets

Very important

Important

R elevant

Simon-KucherProject example


How can you price successfully in this situation?

1. Pricing strategy

Depar tment

Target metric C E O Financing Marketing S ales P roduction

Volume

Market share

Profitability

Profit

Costs

Positioning

Customer satisfaction

Price perception "The best" "High" "Value

oriented" "Fair" "Costoriented"

3


What we of ten see: The "target of the quar ter"

How can you price successfully in this situation?

4th quarter

KPI of quar ter:

Revenue


1. Pricing strategy

4


To do: Develop a clear spare par ts pricing strategy (1)

Pricing vision▹ W hat is our price-value positioning?▹ W hat is our price model

Price reference (e.g. parts, service contracts, ...) Price differentiation (e.g. international, segments, ...)

Pricing targets▹ W hat is the goal of parts pric ing? E .g. to maximize aftersales profits or to

improve cus tomer satis faction/loyalty?▹ How to position parts prices to OE S and OE M competition?▹ How to react to competitor price changes?

Pricing rules▹ W ho is allowed to do what?▹ How do we (re-)act with regard to competitor pric ing?▹ How do we set prices?

Pricing document▹ S hort document▹ C ommunicated, not kept on shelf


1. Pricing strategy

5


S ource: S imon-K ucher.

To do: Develop a clear spare par ts pricing strategy (2)

These guidelines apply centrally and in the markets:▹ As with our whole goods, we signal the superior quality of our spare

parts with our pricing

▹ We never engage in price wars

▹ We identify and leverage willingness-to-pay

▹ L ong-term we want to reach a price level of relevant OE M competition +10%

▹ We lead the OES competition and want to have a premium of 15% on average - markets differentiate and can deviate on parts group level

▹ Warranty pricing is done in the markets

▹ T he central price structure within parts group must never be changed by the markets

▹ Markets are free to set the price levels of product groups as long as no significant grey market activity can be identified

▹ E ach and every par t needs to make a profit

1. Pricing strategy


6


S ource: S imon-K ucher

We often find inconsistencies in central parts pric ing

What we of ten see: Misalignment with value drivers

▹ Smart improvement of central pricing leads to …

… higher profits and better price image / perception

… additional potential in the markets due to the improved starting point of their pric ing

Inconsistencies in central pricing (automotive example)

Model year 2009 2009

Front door 4-doors 2-doors

Weight ∼ 14 kg ▹ 20 kg

Retail $315 $305

+43%

-3%

2. Central list prices


7


S ource: S imon-K ucher, * actual example a brake disc

Many after sales organizations are used to cost-plus-pric ing only. T hey lack the capacity, competence, and tools to integrate price-volume-reactions in their pric ing decis ions. How about your company?

What we of ten see: Willingness-to-pay not exploited

50

100

150

200

70 80 90 100 110 120

Volume

P rice index: 100% = todays price

Price-volume-reaction Turnover and costs

Contribution margin

P rice index

C ontribution margin

P rice index

T urnover, costs

C osts

T urnover-1,1

With competitive reaction With competitive reaction

With competitive reaction

Optimal range

70 80 90 100 110 120

70 80 90 100 110 120

E xpert interviews

R etailer interview

C ustomer interview


Simon-KucherProject exampleInputs

Profit optimal price range

8

Good: Smart cost-plus

Very good: Price driver model

Not good: Pure cost-plus

Approach differentiates margin by drivers that reflect willingness-to-pay

Approach differentiates priceby drivers that reflect willingness-to-pay



Approach of ten lacks structure and loses significant profit potential in pre-sales and after-sales


Overview of dif ferent pricing approaches

Complexity:

Effectiveness:HighLow

HighLowComplexity:


HighLowComplexity:


HighLow

Your pricing approach may dif fer depending on the relevance of a par t or a par ts group

9


S ource: S imon-K ucher; 1 T hese are different but technically s imilar parts for other vehicles .

R esearch all relevant information for pric ing

A pre-requisite for pricing

Competitor insights

OE M: competitors charge $13-$17 for filters in the same segment

OE M: model B (vehic le) is priced 10% above market average

OE S : competitors charge $9-$15 for an identical filter

End customer insights

Price elasticity: -1.8 E nd customers expect a filter to

cost between $10 and $20

Financials

P urchasing cost per unit: $2.50 Dealer discount: 60%


Often a full understanding of all

technical value drivers is missing

Often a solid assumption with regard to price

elasticity is missing

Oil filter elementOwn reference1 parts

Oil filter of A model (vehic le priced 20% below B model): $12

Oil filter of C model (vehic le priced 30% above B model): $17

Technical value drivers Oil filter for B model

L ength: 100mm

Diameter (outside): 65mm

Diameter (inside): 30mm

...

10



To do: Follow these three steps in central pricing

T echn. value

drivers

Model segment

Modelage

…

…

Ø OE Spricelevel

ØOE Mpricelevel

P rice anchor

Retailprice

(2016)

Profit-optimal

price

Max.risk level

Currentstructure

price(2015)

Decide on price adjustment path based on strategic factors

Develop technical price structure

Optimize based on price elasticity

A B C

Long term price adjustment path



P rice-profit-model

R etailprice

(2017)

Min.margin

11



P arts groups specific value drivers that reflect customers ' willingness-to-pay help build internal price structures.

Diameter W idth...

…

Active carbon (yes/no)

S ize...

L ength S ingle vs .

double belts ...

… … …

# of cylinders Top or bottom S teel or alum. S ensor Weight...

Fuel type Weight P re-heating C ar

segment...

0

20

40

60

80

100

0 1,000 2,000 3,000

R etail (€)

L ength in mm

V-Belt (old prices)

0

20

40

60

80

100

0 1,000 2,000 3,000

R etail (€)

L ength in mm

V-Belt (new prices)


A Base price structure on technical value drivers


Internal structures may require work on segmentation, and data availability is key.

12



Costs

Safety relevance

Failingcosts

Qualityappearance

Marketshare

Competitorstrength ...

Foregofrequency

Price level

...

Competitorpricelevel

Elasticity drivers Margin Profitoptimum

P rice volume curve

CrossSelling


Base price level on price elasticity (1)B

P rice profit curve

Priceoptics


13


S ource: S imon-K ucher, numbers alienated

T he elastic ity (and the price-volume curve) for each part is calculated based on the price elastic ity drivers .

Base price level on price elasticity (2)B



OT Ccustomers

-0.96

Elasticity calculationEngine hood Luxury class

Customer group

Marketshare

Vehicleage

Vehicleclass

Foregofrequency

Elasticity drivers

Partsprice

Com-petitive

situation

-0.10

61 to 80% 0-8 years

+0.06

L uxuryclass

+0.52 medium

±0 bigger $500

-0.22

No-NameC ompetition

x 0.5 Elasticity:-0.35

The parts elasticity was calculated on the basis of 200 reference parts(Customer survey, Dealer survey, Expert survey, multi-dimensional regression)

Elasticity continuum

Battery

...

Breakingdisc

Instrument panel

Rel

evan

ce o

f ela

stic

ity fo

r pr

ice

deci

sion

14


S ource: S imon-K ucher, Analys is of 400 reference parts with regard to list prices

W hen deciding on the retail price, you should take strategic parameters into account.Among these are price image as well as price leadership aspects.

Systematically integrate strategic factorsC



Distribution of price leadership casesAnalysis of price leadership history

Parts number47410xxx

Parts nameE xhaust pipe

OE M

OE S

P rice level in E uro

Date

25%

19%

38%

18%

No correlation

Weak correlation

Medium correlation

High correlation

Example: High correlation -OES follows OEM

15

-50%

0%

50%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



-50%

0%

50%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

-50%

0%

50%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

-50%

0%

50%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

δ = 9%

δ = 5%

δ = 10%

Ø 10%

Ø 40%

Ø 20%Ø 26%

δ = 17%

Factor vs. central retail Factor vs. central retail

Factor vs. central retail Factor vs. central retail

P roduct lines ranked by sales

Ø 7%

Unweighted average

Sales weighted average

Ø 12%Ø 14%

Ø 17%

Key takeaways:

▹ Markets use dif ferent approaches to mark-up/-down the recommended central retail price

Germany tends to position prices in a narrow corridor

US and China cap their retail mark-up at about 50%

UK uses a large spread of market adjustments (from -30% to +300%)

China balances aggressive sett ings on service parts with high sett ings on captive

▹ T his OE M faces a strong challenge to maintain price consistency

3. Market list prices

E xample individual product line

What we of ten see: Uncoordinated international pricing

δ : s tandard deviation

16

Source: S imon-K ucher

You cannot possibly set 1,000,000 s ingle prices right in each market!

1,000,000 decis ions on single par ts level once (HQ) …

… and a few hundred decis ions in the markets

▹ C lear and detailed price logic in groups based on multiple general price drivers

▹ E xploits local willingness-to-pay based on market price drivers

Brake discs

Air filters

(Retail) factor

(Retail) factor

0.92

1.08

1.25

0.98

1.15

1.35

$200

$300

$100

$20

$30

$10


To do: Build one central price structure …


17


* Factors ‘ list s ize and composition depends on manufacturer, market and product line.S ource: S imon-K ucher

T he price structure should be defined centrally once, and regional price levels should be adjusted accordingly based on the most relevant market factors

$150

$200

$300

Central gross retail pricingon par ts levelE xample: P arts group "B atteries"

Lean pricing in regions on parts group level

Market factoron par ts group level

$150 * (1+x)

$200 * (1+x)

$300 * (1+x)

Challenges ▹ C lear rules▹ C lear segmentation (parts groups)▹ C lear pric ing logic within/between

groups

▹ Identify value drivers for parts prices▹ Unders tand goals/s ituation of

parties involved▹ C lear discount s tructure & criteria

▹ Identify regional drivers for price level differentiation

▹ Implement smooth process between region & HQ

based on factors* such as…

▹ L ocal OE M competition▹ L ocal OE S competition▹ R egional benchmark▹ Dealer mark-up behaviors▹ Machine down relevance▹ W arranty level▹ Fleet relevance▹ Absolute price level▹ S hare in total invoice▹ etc…

▹ Volt▹ G roup s ize▹ C C A▹ W eight▹ C ost▹ G eneral competition…

based on factors* such as…


To do: Set market list prices based on key indicators

18



Not allowed After consultation with HQ

Decision Small markets Medium markets Big markets

Pricing Inflationary price adjus tment

P rice re-positioning

P rice of country-specific parts

Discounts Deviation by >=3 discount groups

Deviation by 1-2 discount groups

Bonus Definition of bonus conditions

Free decision


To do: Be clear who is allowed to adjust what and how


19


.

What we of ten see: Misaligned discount levels

Oil filter elements Gearboxes

Alternatives to genuine Yes No

Dealerloyalty T hreatened S ecure

Dealer stocking policy

On-stock Not s tocked

Dealer margin 44% 44%

Key takeaways:

▹ B oth product lines have s ignificantly different market requirements

▹ However, the dealer margin is the same

▹ T his is an example where differentiated dealer margins would make sense, both for the OE M as well as for the dealer

4. Trade conditions



20



To do: Set discount levels based on key indicators

T he higher the discount group the higher the discount

High

L ow N

eed

for

disc

ount

Discount driver definition

1

Discount codes

2 3 4 5

Product group allocation

1. S pecial strategy

5. P rice value

6. Need for tactical cam.

7. Most frequent channel

8. Harmonization factor

2. Market share

3. OE M benchmark

4. Aftermarket bench.

9. S tocking guidelines

10. Min. dealer margin...

S

M

M

M

I

M

M

M

C

C

Example driversFactor weight

MS MarketStrategy CI CostInternal

4. Trade conditions


21

95% 100% 105% 110% 115%

90% 100% 110% 120% 130%



If a bonus plan has too many elements, rewards are unattractive, or if targets are too difficult to achieve, it will most likely have no effect on dealer behavior.

To do: Check if your bonus plan really steers behavior

▹ If dealers aim for salient revenue targets this would show up as jumps in the distribution of the percentage of the target reached

▹ However, dealers in this example do not react to thresholds in bonus plan

90% 95% 100% 105% 110% 115% 120%

C um. share of dealers

Bonus criterion A Bonus criterion B

Bonus criterion C Bonus criterion DT arget


T arget


90% 100% 110% 120% 130%


T argetT arget

4. Trade conditions


Dotted lines indicate bonus thresholds

22


S ource: 2009 study on spare part price image in G ermany among 100 fleet customers of luxury vehicles ; Numbers alienated for confidentiality reasons; 1 Independent After S ales

What we see: Price image is not optimally steered

5. Price image

▹ Many companies mismanage their price image

▹ As a result, customers don’t even include them in their consideration set

▹ C ompanies frequently focus too much (or solely) on price attractiveness and lose s ight of other price image aspects (e.g. price value)

Key issues:

B etter utilize "eye-catcher" prices

B e sure to steer all aspects of price image

Align purchase process and price image

Assist your sales force in value selling

Solutions:A

B

C

D

3,6

4,2

3,31 5

1 5

1 5

1 5

4,0

Spare part price image of OE M fleet customers

n=40

attractiveprices

very highprices

And how is this in reality? Do you know?And how is this with regard to IAM1?

23



… if you want to increase price attractiveness.

To do: Better utilize eye-catcher prices

5. Price image

▹ Low prices and active price communication on eye-catcher spare parts

▹ ... to increase perceived price attractiveness

▹ ... to generate traffic10%

60%

30%

< 95% 95% - 105% > 105%

Percentage of article numbers

Cheaper than competitors

Similar to competitors

More expensive than competitors

Competitive price level

A

24

… and don’t focus on price attractiveness if it doesn’t fit your core brand.

S ource: S imon-K ucher; Price consistency = customer certainty that the prices are consistent over time and for all customers ; Price security: customer certainty that a given price is the one actually being paid (and not more) and the agreed on services/benefits are actually being delivered (and not less).

To do: Be sure to steer all aspects of price image


Price image Purchase intent

T he price image is the customers ' knowledge and assessment of various price attributes. T he price image encourages customers to purchase/be loyal.

Price satisfaction

Purchase intent/loyalty

Willingness to payPrice

attractivenessValue

for moneyPrice

transparency

Priceconsistency

Pricefairness

Pricesecurity

5. Price image

B

25

Price imageProcess steps of vehicle services Variants

Value for money

Attracti-veness

Trans-parency

Consis-tency

Price fairness

Price security Expenses/ costs

1. Agreed on date

2. Vehicle acceptance

3. Information about repairs and prices

4. Transport

5. Side information(e.g. additional repairs)

6. Vehicle pick-up and payment process

Service

No replacement car

- No

Taxi voucher Low flat fees

Replace-ment at low cost

Charges for providing replacement car

Comparable replacement free of charge

Low administrative/ time expenses for replacement car

Service communication

Printed price list

...

… to optimally steer your price image.


To do: Adjust all steps of the purchase process …


Degree of influence low high

5. Price image


C

$

$$

$$$

26



Not all sales people are equally skilled when it comes to communicating the benefits of your parts to your customers and thus implementing your target prices.

To do: Assist your sales force in value selling

5. Price image

Organize

Great

Analyze

Train

Tools

Coach

Good

P rocesses

G overnance

R esources

S trengths

Weaknesses

Industry comp.

C ommunication c .

E motional comp.

Inner strength

P rocess comp.

B enefit arguments

C ounter arguments

P ractice

P ractice

P ractice

and learn from it

Diagnose maturity

Identify best & worst practices

B uild knowledge P rovide templates

P rovide persuasive proof for your arguments

Installmock negotiations

Integrate persuasion management in daily processes

C ontinuously improve


D

27



E xtra efforts to optimize your spare-parts pric ing will pay off immediately. Spare par ts price optimization projects of ten increase profit by 4 to 6% of turnover.

Spare par ts pricing pays of f

0%

2%

4%

6%

8%

10%

12%

14%

84-86 88-90 92-94 96-98 100-102 104-106 108-110 112-114 116-118 120-122 124-126 128-130 132-134

# Part numbers Turnover

Optimized price level (index)

S hare of parts / revenueØ price increase: 8%Ø volume decrease: 2%Ø profit increase

as % of turnover: 6%


28



Top initiatives that take par ts pricing from good to great

▹ Develop a clear strategy for spare par ts pricing

▹ Base the price structure on technical value drivers

▹ Base the price level on price elasticity

▹ Adjust market list prices and discounts indicator-based

▹ Check if your bonus system really steers dealer behavior

▹ Be sure to steer all aspects of the price image actively

29


Good news for you


Pricing offers many oppor tunities for optimization

There is very significant profit potential in spare par ts pricing

I wish you success in capturing it!

30

Source: manager magazin, August 2011/IMB , survey among G erman top managers , brandeins 4/2014

Simon-Kucher & Par tners


World leader in giving advice to companies on howto price their products

Pricing strategy specialists

The world’s leading pricing consultancy

In pricing you offer something nobody else does

BusinessWeek The Economist

P rofessor P eter DruckerThe Wall Street Journal

World leader in pricing

1 Simon-Kucher& Partners

2 B oston C onsulting G roup

3 McK insey & C ompany

manager magazin

Marketing and sales

Simon-Kucher& Partners

B oston C onsulting G roup

McK insey & C ompany

brand eins Thema

Marketing and pricing

Simon-Kucher& Partners

B oston C onsulting G roup

McK insey & C ompany

Sales and CRM

......

S ource: manager magazin survey of top managers in G ermany, August 2007 and 2011/IMB

S ource: brand eins Thema/Statista survey of 1,426 partners and project leaders from consulting firms and 1,300 C -level managers from G erman companies , May 2014

No. 1 in marketing and sales in Germany

Strategy> 400

Sales> 500

Marketing> 500

Pricing> 1,000

Global presence > 2,000 projects in the last 3 years

AmsterdamB arcelona

B onnB russelsC ologne

C openhagenFrankfurt

IstanbulL ondon

L uxembourg

Madrid MilanMunichP arisW arsawViennaZurich

T orontoB oston

New YorkS an Francisco

S ão P aulo

S antiago

Dubai

B eijing

T okyo

S ingapore

S ydney

29 offices worldwide, 760 employees€172m revenue in 2014

Atlanta

31

Simon-Kucher & Par tners: Spare par ts experience



This presentation reflects our experience from many spare parts projects


Project work included

▹ Definition of s trategic guidelines

▹ Market-oriented segmentation of parts

▹ C entral gross pric ing logic

▹ Market gross pric ing logic

▹ Market discount & bonus sys tems

▹ Variant management to reduce part number complexity

▹ Training of pric ing teams

▹ Implementation of tools & sys tems

ABB

AGCO

Andrew Page

BMW

Caterpillar

Knorr-Bremse

KTM

MAN

Maserati

Mercedes

Michelin

Porsche

SEAT

Siemens

Schindler

Trost

Truma

Valeo

Volkswagen

Volvo

Wincor Nixdorf

…

32

Peter Harms is Senior Director with Simon-Kucher & Partners in Boston.

His consulting focus is on pricing and sales management, in particular on negotiation management.

Peter helps his clients to better understand, quantify and communicate their customer benefits. He improves his clients’ capabilities to better develop and exploit their customers’ willingness-to-pay.

He has conducted consulting projects for companies in Europe, North America and Asia. Among his customers are automotive manufacturers, automotive suppliers as well as machinery and heavy equipment manufacturers.

In addition to his consulting work, Peter is speaker, coach and trainer in the areas of "Power Pricing", "Sales Excellence", and "Negotiation Excellence".

Peter studied business engineering at the university of Karlsruhe (TH), Germany, and has been with Simon-Kucher since 2001.

Simon-Kucher & Par tners

One Canal ParkCambridge MA 02141USA

e-mail:[email protected]


Simon-Kucher & Par tners: Peter Harms

Optimizing spare parts pricing 33

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