Pricing Strategy - Capital Equipment
The capital equipment business model used to rely on an installed base of new units sold at low margin to create demand for high margin spare parts and service as a way to grow profits.
Capital Equipment Industry Insight
In the past, the capital equipment business model relied on an installed base of new units in the field. This model created demand for spare parts, services, 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 pressure 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 optimise their return on investment. Many are supplementing cost-of-ownership measurements with asset management techniques.
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 are further potential downsides to margins if the only initiatives are the introduction of more stringent signoff policies and the employment of a pricing analyst.
Despite these challenges, 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 for each application of that product.
Working in conjunction with dealer networks and distributors, OEM companies can create a business model to address the needs of dealers. 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.
Our Clients in the Building Materials Industry
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 where we can help your business 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
How to generate an extra 630 basis points of margin in one year. [$1.4M in gross profit on revenues of $22M]
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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.