Capital Equipment Pricing Strategy

The capital equipment business model used to rely on an installed base of new units in the field creating demand for spare parts and service all backup rental fleet demand.

Insight

In the past, the capital equipment business model relied on an installed base of new units in the field. This installed base of units created demand for spare parts and service and casual fleet hire. New units were often sold at cost or single digit margins to drive demand.

With the advent of more sophisticated applications, the integration of technology into capital equipment and the fragmentation of customers into very specific market segments, pricing for capital equipment requires more sophisticated approaches to maximise margin.

OEM manufacturers compete in a global environment with continued pressures on margins. Cost-of-ownership of capital equipment—including price, throughput, downtime, maintenance cost, training and spare parts—used to be sufficient for manufacturers in evaluating their equipment purchases.

With costs constantly increasing, companies need to look elsewhere to optimize their return on investment. Many are supplementing cost-of-ownership measurements with asset management techniques.

The major risks for OEM capital manufacturers is not overpricing their products but under-pricing. Pricing based on cost and market segment are no longer effective ways to set and manage pricing to market.

Markets are now segments of one customer, and pricing strategies and structures need to be flexible to address this level of complexity.

With the advent of grey markets, Will fit parts makers and online auction houses, there are even more margin pressures on the previously protected aftermarket product range.

Many OEM companies have made some changes to pricing but from our observations there is further downside risk to margins if the only initiatives to date are the introduction of more stringent signoff policies and the employment of a pricing analyst.

There are still substantial margin improvement opportunities for OEM equipment manufacturers. Detailed line-item level analysis of each model in the range is required along with an even deeper analysis of the value drivers realised by customers for each application of that product.

Working in conjunction with the dealer network and distributors, OEM companies can create a business model solution to address the needs of dealers to win business and OEM companies to protect, and in selected strategic cases, expand margins.

The aftermarket product range also presents substantial margin improvement opportunities through algorithmic price segmentation. Many OEM companies have created marketing codes to identify potential pricing power for various park groups.

Managing a range of 10,000 to 100,000 parts requires a more sophisticated approach to pricing strategy. Detailed line by line analysis of each part is needed to identify the real pricing power opportunity for those parts.

A pricing strategy by customer is then undertaken to protect margins and identify further sources of margin expansion.

Expertise

Our experience in the OEM and capital equipment sector is significant. We work with Fortune 500 companies, European global companies and ASX listed companies.

Our work with these companies has spanned Australia. New Zealand, Singapore, Malaysia, Thailand, Vietnam, and Indonesia. We have experience negotiating transfer prices from factories located in the USA, Japan, the Netherlands, and Italy.

We have also worked closely with dealers in all of the above countries with deep exposure to the Caterpillar global dealer business model.

Areas we can help your business improve profitability include:

  • Pricing strategy diagnostics
  • Algorithmic price optimisation for products and customers
  • Pricing strategy workshops
  • Customer value driver discovery
  • Contract negotiations
  • Pricing fundamentals training for your sales force

Next Steps

You may be wanting to develop a strategic pricing capability and move from a cost-plus culture to a sophisticated value based methodology. Pricing Insight can work closely with you at both a strategic and operational level to improve earnings and profitability.