Friday, February 7, 2014

7 Mistakes To Avoid In Parts Pricing

What’s the hardest thing for OEM pricing managers to admit? It’s probably that their department isn’t in order. Admitting problems can be seen as weakness – or worse, it can initiate finger pointing and blame. Yet, parts pricing is one area in aftersales where a renovation can yield powerful results: dramatically improved profits and increased customer satisfaction at the same time. Dynamic pricing managers with can-do attitudes are brushing shame aside and taking on this challenge of reforming operations.

The fact is, many OEMs struggle with the complexities of parts pricing, which requires multiple correct decisions on strategy, process and policy. What can go wrong? In over 20 years of pricing experience, Carlisle has encountered seven common mistakes.

Mistake 1: Applying a series of “Band-Aid” patches, rather than rebuilding in one bold sweep
  • When your pricing department is a pain point, don’t think that a series of patches will solve the problem. They simply can’t. This is equivalent to caulking the windows of your house when the entire foundation is rotten.
  • What will help is a comprehensive, broad sweep. That is, sweep away the legacy of errors and start with a solid new foundation. Fortune favors the bold.
Mistake 2: Chasing textbook concepts that don’t apply to motor-vehicle aftersales
  • The recent interest in pricing has generated many new books on the subject. Those written by university professors, in particular, seem to capture the imagination of corporate top management in a way that nuts-and-bolts books on inventory management never do.
  • Professors often drift off into heady concepts such as pricing elasticity, yield pricing and economic value added. They are excited by ideas like customer lifetime value, penetration pricing, and lifecycle pricing.
  • Dozens of these concepts may be intellectually interesting, but that doesn’t mean they apply to aftersales parts pricing.
  • Don’t get pushed off course by calls to implement all sorts of fancy concepts.
  • Be brutally honest. Ask yourself if the proposed methods apply and, if so, how they can be implemented in your parts world.
Mistake 3: Assuming that a pricing system comes pre-loaded with a strategy and a process
  • Unfortunately, OEMs often start at the wrong place. They choose pricing software before determining the pricing strategy and the processes needed.
  • Of course, software is useful. But even smart top managers have made the mistake of assuming that pricing software comes pre-loaded with the strategy and process that will solve their problems.
  • Pricing software is more like a spreadsheet package. What do you see when you start Microsoft Excel? A blank page with empty rows and columns. Excel needs data. You must program it before you can use it. Excel is incredibly powerful, but without inputs and methods it is useless.
  • The same is true with pricing software. When you install it, the implementation team will ask you what processes and strategies to embed.
  • That’s why you should determine your strategy and processes before you choose pricing software.
Mistake 4: Pricing without proper competitive data
  • Proper market data is the fuel that drives good pricing. This is particularly true for competitive market research. The better the research aspect is handled, the more effective your resulting pricing actions can be.
  • If your pricing activity were a vehicle, then competitive data would be the fuel that drives it. Higher octane fuel delivers higher performance. Many OEMs are running on low grade fuel today, or even on an empty gas tank.
  • However, to get the process of competitive price research right on a global scale is not trivial; it’s almost akin to chemically refining oil to make gasoline.
  • Cracking the code for this is hard… because each country has a different market structure, different competitors, and a different legal framework for what can be researched.
  • Do your research properly and you will get high-grade information in the most cost effective way. Do it wrongly and you may end up with a wasted budget or even lawsuits.
Mistake 5: Pricing without visual guidance
  • This is one of the simplest mistakes you can make, and one of the most widespread. Charts, graphs and diagrams are powerful ways to show what is going on.
  • Many OEMs, and even software packages, don’t use visuals to illustrate pricing issues or solutions. That means you’re setting prices and margins using only the numbers on the page, without even a graph to illustrate the concept behind the numbers.
  • Unless you possess exceptional mental gifts, you simply cannot digest a page full of numbers.
  • A chart or visualization, however, is a powerful way to diagnose what is going on.
  • We strongly recommend making every part of the pricing process visual.
  • Until artificial intelligence arrives for real, the most powerful supercomputer is the human brain. Harness the power of your pricing analysts by displaying data in a way that everyone can comprehend.
  • It’s not about simply having charts; it’s about having the right charts. What’s on the axes of your graph can make a world of a difference.
Mistake 6: Spending money on a software system that doesn’t have the functionality you actually need
  • We all know that buying enterprise software is annoying and expensive; implementations are even worse, as they are dreadfully boring (*yawn*).
  • In the grey and dreary process of software selection and implementation, we folks at OEMs desperately latch on to anything to spice up the process – cool-sounding features, colorful graphs, enthusiastic salespeople, big dollar signs
  • Unfortunately, the cool features can cloud out our interest in looking for the basic functionalities. For example, does our software package come standard with the basic things we need like real algorithms for pricing competitive parts, multiple countries and currencies, supplier cost management, sales allowance handling, etc.?
  • If it doesn’t come standard with these, one of two things can happen. You’ll either be forced to change your strategy and processes to adapt to what the software can actually do or you can spend more money on customization.
  • Yes, customization is fine. Pretty much anything can be customized and re-programmed in software. But, the price tag is high. Not just the money you spend, but typically you lose the elegance and simplicity by making patchwork changes to systems (see ‘Band-Aid’ mistake 1 above).
Mistake 7: Lack of proper organizational design, roles, and responsibilities
  • Here’s another mistake to avoid. This time it’s about letting the pricing organization drive the marketing strategy in the absence of inputs (“shadow marketers”).
  • Carlisle has visited several OEMs where the spare parts pricing team makes decisions on behalf of other departments like sales, marketing, finance, and purchasing.
  • Why on earth would this happen and why do other functions ever allow this?
  • Well, when determining the price of a part you need to access many aspects of the marketing mix (for example what’s the strategy, what is the role of the list price, who is the relevant competition, what’s the price position, what profits are acceptable, etc.).
  • In a normal world these critical inputs are available and delivered by other departments. Where they are not communicated (bad) or do not exist (even worse), some decisions are still required in order to move on and set a price.
  • We’ve heard countless pricing departments say that, absent any firm statements from other departments, they will make their own decisions on such topics.
  • What this means for managers is that parts pricing is making decisions for other departments far outside of the responsibility of parts pricing (i.e. the decision vacuum is often filled by the pricing team, which becomes a “shadow marketing team”).
Bottom Line: The opportunity in parts pricing is enormous, but there are plenty of pitfalls. Keep these seven mistakes in mind when you next review your parts pricing. Or simply call us; we’ll help you navigate these and other pitfalls.

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