Rethinking Cost-Plus: The Journey to Market-Based Pricing
Sep 12, 2023
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This podcast discusses the challenges of pricing spare parts for machine manufacturers and the limitations of traditional pricing models. It explains the advantages of market-based pricing, including maintaining profitability and incentivizing innovation. The podcast also explores the benefits of market-based pricing in a dynamic industry and the challenges of implementing it. It emphasizes the importance of data collection, access to information, and alignment with customer needs in successful pricing strategies.
Market based pricing helps manufacturers capture maximum value from each component sold and predicts shifts in the market and customer needs.
Market based pricing differs from cost plus pricing by setting prices based on market demand, allowing for flexibility and agility in adjusting prices according to market shifts.
Deep dives
Benefits of Market Based Pricing for Manufacturers
Market based pricing helps machine manufacturers stay competitive and maintain profitability. It reflects real-time value by aligning pricing with market demand and what customers are willing to pay. It also enables manufacturers to respond to competition by staying informed about competitor pricing. The primary benefit is that market based pricing drives profitability by capturing maximum value from each component sold. Additionally, it incentivizes innovation and helps predict shifts in the market and customer needs.
Difference between Market Based Pricing and Cost Plus Pricing
Market based pricing differs from traditional cost plus pricing for machine manufacturers in several ways. Cost plus pricing is based on production or purchasing costs with a markup. Market based pricing, on the other hand, sets prices based on market demand and competitor prices. Market based pricing allows for flexibility in adjusting prices according to market shifts. It also presents opportunities for increasing prices to market levels, particularly for underpriced parts. Overall, market based pricing is more agile and responsive to market dynamics.
Benefits of Market Based Pricing in a Dynamic Industry
Market based pricing provides agility and flexibility in a dynamic industry with fluctuating supply and demand. It allows manufacturers to quickly adjust prices in response to market shifts. Market based pricing helps in hedging against economic downturns and minimizing risk. It also enhances customer satisfaction by offering competitive prices and positioning the manufacturer as a one-stop shop for all parts needs. Ultimately, market based pricing contributes to the stability of the industry by making manufacturers more resilient and better prepared for market changes.
Effectively pricing spare parts remains a substantial challenge for machine manufacturers, as an estimated 73% of commodity parts are sold below their optimal price points. Traditional pricing models, such as cost-plus and value-based pricing, exhibit significant limitations in this evolving market. To navigate these challenges, Original Equipment Manufacturers (OEMs) must adopt market-based pricing strategies. This approach not only enables them to enhance their parts business but also accelerates revenue growth and cultivates stronger customer loyalty.
Tim Geyer leads MARKT-PILOT in North America. Prior to joining MARKT-PILOT, Tim led the charge into new markets helping international startups scale. Additionally, he was a member of the Energy Strategy practice of Accenture. Early in his career, Tim was an innovator in the manufacturing industry driving revenue in sales and service roles. Learning at the forefront of new technology inspired Tim to help lead the change in the aftermarket parts industry with MARKT-PILOT. He brings to the US market, best practices from 100+ European manufacturers to share with OEMs across the US and Canada.
Tim earned his BA in Industrial Management from DHBW Stuttgart and his MSc in International Business Development from ESB Business School with research stays in Rotterdam and Melbourne. Tim is also an active tennis player and avid soccer fan, rooting for VfB Stuttgart every chance he gets.
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