There’s a mythic legend we’ve all probably heard of related to the “Lemming Suicide Plunge.” The story goes that lemmings — small, short-tailed rodents – are apparently overcome by deep-rooted impulses and deliberately run over a cliff in the millions. They are dashed to their deaths on the rocks below or drown in the raging ocean. I would suggest this may well be a metaphor for pricing strategies in the service parts industry. With the industry-norm cost-plus pricing strategy, implemented by company-after-company following each other, it takes on a lemming-like effect, regardless of the consequences.
The conversation goes something like this: Everyone in the industry uses a cost-plus pricing strategy. They won’t give me access to their data. I can’t optimize hundreds of thousands of parts. Blah, blah, blah.
These and other reasons are simply excuses as to why companies cannot optimize their service part prices. I say baloney.
If you knew your customers’ willingness to pay (WTP) for a service part, you could have a huge impact on your company’s profitability and market share. However, determining that exact price can be especially difficult for service parts manufacturers and distributors.
PROS Vice President of Science and Research Dr. Neil Biehn and PROS Strategic Consultant Tim Mohnke collaborated on a white paper titled Determining Willingness-to-Pay Within Reach of Service Parts Companies. In it, they offer insights into why a customer’s willingness-to-pay is independent of the production costs for a service part. Willingness-to-pay is a fundamental concept to understand how to leverage the power the pricing instead of following the industry norm cost-plus strategies like lemmings from a cliff.
I encourage you to download the paper. Feel free to send me a note or let me know if you have questions or how we can help you add to your knowledge base.
Other related posts of particular interest:
If you want to understand the pitfalls of cost plus pricing, I recommend Paul Hunt’s reasoning, http://www.pricingleadership.com/why-cost-based-pricing-sucks
If you want another perspective on Willingness-to-Pay, I recommend Patrick Schneidau’s, Myth #4, http://www.pricingleadership.com/yes-you-can-understand-customer-specific-willingness-to-pay