Pricing to Outperform: A Better than "Average" Strategy for the Service Parts Industry

Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1PB Pricing to outPerform: A Better thAn “AverAge” StrAtegy for the Service PArtS induStry unlock your data • unleash your Sales By Sean Duclaux, Service Parts Industry Marketing Manager Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 32 Copyright © 2013, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or for a particular purpose. We specially disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 32 Why your Pricing Strategy may no Longer Be Adding up The task of increasing sales and profitability in the service parts industry can be quite challenging. While the industry remains an economic force, a series of trends, including pressure from customers to cut prices, higher costs for raw materials and increased competition from global providers, have forced suppliers to find ways to become leaner and more efficient. In order to do this, they have focused primarily on efforts to rationalize capacity and production. The results, as reported by 2011 On the Road: U.S. Automotive Parts Industry Annual Assessment, have had little positive influence on margins. Recognizing that price is the number one lever to improve margin, companies must look to improve their pricing strategies in light of these new economic realities. The service parts industry (specifically, automotive, heavy equipment, aircraft and parts manufacturing and distribution) generates trillions of dollars in annual revenues. Given the fact that many of the industry’s manufacturers and distributors struggle with pricing, it is clear that these revenues, albeit impressive, do not come close to capturing market potential. Why are these companies selling themselves short? The answer to this question may be answered, in part, by considering service parts industry leaders’ miscalculations of their pricing performance. PROS recently surveyed 100+ service parts industry executives to gauge their strategic pricing performance. The paper below explores the results of this survey, asks probing questions that emerge from these results, and suggests ways for service parts companies to take their pricing strategy to the next level. Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 54 SURVEY DEMOGRAPHICS • AUTOMOTIVE, MOTORCYCLE, HEAVY EQUIPMENT, AIRPLANE • MANUFACTURING, DISTRIBUTION VERTICALS • 62% HAD ANNUAL REVENUES >= $500M; 38% < $500M • 94% OF RESPONDENTS HAD A JOB LEVEL OF MANAGER OR HIGHER • OVER 50% WERE IN SALES, PRODUCT MANAGEMENT, OR PRICING Survey Says... To quantify their performance, our survey respondents were asked to rate their company’s overall pricing performance (e.g., business problems, technology, and pricing strategy). Our survey results (see Fig. 1) indicated that most respondents rated themselves as slightly above average, with a mean score of 3.1 on a scale of 1-5, five being excellent. The responses of the two sectors surveyed were similar; midmarket executives rated themselves an average of 2.8, while enterprise executives scored themselves an average of 3.2. But, is their pricing maturity really average? What constitutes average? And, as service part industry leaders, are you satisfied with being average? is Process getting in the Way of Progress? Customers from both enterprise (≥ $500M in annual revenues) and midmarket (≤ $499M in annual revenues) sectors were asked to consider, in terms of their individual business environments, the top ten business challenges impacting today’s service parts industry (see Fig. 2). The enterprise executives most often cited challenges related to globalization, while their midmarket counterparts reported a greater incidence of ineffective management of concessions and promotions. Interestingly, both sectors cited difficulty capturing meaningful data. Meaningful data is fundamental to developing better pricing; without it, companies suffer from a domino effect related to the following identified challenges: Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 54 • Lack of meaningful data to Set Better Prices. To price effectively in today’s environment, having access to competitive, cost, and historical pricing information at the right time is crucial. • reliance on cost-Plus Pricing Strategies. The relatively simple calculation of cost plus desired margin fails to consider a product’s value measurement and in doing so, limits its profitability. • ineffective management of Pricing decisions due to Product volume. New part introductions tend to outpace the speed at which new parts can be effectively priced, resulting in a backlog. • Pricing Systems that do not Address the complexities required in a global Setting. Without the functionality of a single system to support the end-to-end global pricing process, companies struggle to manage regional competitiveness. • difficulty Knowing All Parts have Been Priced. The velocity and variety of new part introductions increases the risk of profit loss. • difficulty Analyzing the impact of a Pricing change. Without the proper analytic tools to compare pricing strategies across their product categories, companies cannot accurately forecast the impact of a price change on margin, revenue or volume. • Lengthy Publication Process for new or updated Price Books/Lists. Current manual processes are labor and time intensive, decreasing companies’ agility in the market as well as their responsiveness to customers. • inadequate graphical dashboards or Analytics. Many companies rely on spreadsheets to compile their pricing information, yet this tool offers little in the way of analytics, necessitating the use of a secondary tool, such as an enterprise resource planning (ERP) system. 1 0 10 20 30 40 2 3 4 5 Figure 1: Y-axis = overall pricing performance (1=poor; 3=average; 5=excellent) X-axis = number of respondents “BEING AVERAGE MEANS YOU ARE AS CLOSE TO THE BOTTOM AS YOU ARE TO THE TOP.” – John Wooden, Legendary Basketball Player and Coach Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 76 0% 20% 40% 60% 80% Do not have data to set meaningful prices Cannot effectively manage service parts promotions or rebate programs Cannot effectively manage pricing decisions due to the volume of SKUs/parts Current pricing system does not address the complexities required in a global price setting Difficult to analyze impact of a pricing change Do not have adequate graphical dashboards or analytics Cannot respond quickly enough to special price requests or complaints Rely primarily on cost-plus pricing strategies Takes too long to publish a new or updated price list/book Do not know if all parts have been priced Figure 2: Y-axis is description of business problem X-axis is % of customer respondents experiencing the business problem Green bar is mid-market customers. Blue bar is enterprise customers. Orange Line is Overall Respondents • Slow response to Special Price requests or complaints. The lack of integration between customer complaint and pricing systems is cost-prohibitive and results in an inefficient complaint handling workflow. • ineffective management of Service Part Promotions or rebate Programs. When all relevant cost and pricing information is neither automated nor accessible through the same system, businesses cannot accurately predict the impact of promotions or rebates on revenues. When asked about the pricing issues currently impacting their company’s profitability, on average, respondents cited four of the top ten industry challenges we identified (see Fig. 3). Given the increasingly competitive nature of today’s business climate, as well as the globalization of the service parts industry, the impact of just one of these challenges on a single organization is huge. The impact on a company experiencing nearly half of these problems would appear disastrous, but this scenario is exactly what the majority of our respondents are experiencing. Moreover, more than 60 percent of those surveyed reported experience with at least three of the industry’s top problems. How are these same executives claiming to have better than average pricing performance? Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 76 What’s driving your Profit? In order to gauge what really makes a pricing organization better than average, PROS asked survey respondents about their use of technology to improve their pricing. Not surprisingly, many of the respondents use a mix of spreadsheets, ERP, purpose-built software and custom solutions. Consistent with the results of other surveys conducted by pricing industry experts, more than 60 percent of our respondents reported using spreadsheets, and nearly 50 percent reported reliance on ERP (see fig. 4 on the following page). 1 0 5 10 15 2 3 4 5 6 7 8 9 10 Figure 3: Y-axis is number of business problems X-axis is number of respondents “WHILE OUR ACCESS TO RAW INFORMATION HAS GROWN EXPONENTIALLY, OUR TIME TO PROCESS THIS INFORMATION HAS DECLINED RAPIDLY, WHICH HAS PLACED AN UNPRECEDENTED PREMIUM ON THE ACT OF MEANING-MAKING.” – George Dyson, Technology Historian Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 98 0% 20% 62% 34% 21% 45% 40% 60% 80% Spreadsheets Enterprise Resource Planning Purpose-built Pricing Software Custom Coded Solutions Figure 4: Y-axis = Implemented technologies X-axis = % of customers leveraging the technology While the reported usage of spreadsheets is consistent between enterprise and midmarket companies, enterprise companies did exceed ERP usage by nearly 10 percent over their midmarket counterparts, 48 percent and 40 percent, respectively. Of those companies that reported using spreadsheets, 50 percent use this technology as their sole pricing technology, whereas 33 percent also reported using an ERP system. Can spreadsheets really serve as a viable business tool for service parts companies that must manage large volumes of data? Spreadsheeting yourself thin A majority of service parts companies, as captured by our survey, manage in excess of 50,000 stock keeping units (SKU) and, in some instances, this number is greater than 100,000. When taking into consideration product options, bundles and components, attempting to manage a product catalogue of this magnitude is nearly impossible with spreadsheets. Beyond the sheer volume of data, human interaction within a spreadsheet system leads to frequent errors and quality issues, leading pricing and sales teams to lose confidence in the strength of the outcomes. Given companies’ reported reliance on spreadsheets (as much as 60 percent, as noted above), this technology arguably underlies many of the business challenges highlighted in this paper, namely the lack of meaningful data, the inability to price a large volume of SKUs, inadequate analytics and difficulty understanding the impact of pricing changes. While companies may naturally gravitate toward using spreadsheets for many tasks because of their pervasiveness and familiarity, their application in a high-performing pricing organization is questionable at best. Why risk your business’s ability to analyze data, optimize prices and beat the competition by relying on a tool with inherent inefficiencies and liabilities? Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 98 eeeerrrrpppp!: that’s the Sound of your investment collapsing Given their significant use of ERP systems, companies clearly want to ensure they are getting the maximum return on investment (ROI). Because these systems provide enormous power and range in managing critical data, wouldn’t IT executives want to expand their use to include pricing as well? By capitalizing on their investment in ERP and applying this technology to pricing, companies would gain the ability to turn the latent potential of collected data into more profitable pricing decisions in the field, effectively helping to drive their corporate pricing strategy. ERP systems, for example, provide a system of record for prices, orders and invoices. In many cases, however, ERPs will obtain a price from tables that can be applied to quotes, orders or invoices. While the process may be efficient, it begs these questions: How does a pricing team calculate the right price to put into the ERP in the first place? Is it the best price for the company? For the customer? Given the fact that one-third of our survey respondents who reported heavy usage of spreadsheets also reported ERP usage, it seems reasonable to conclude these companies are using spreadsheets to calculate prices, which they then use to populate their ERP systems. The inaccuracies and problems associated with spreadsheets, highlighted earlier in this paper, reveal the flaws inherent in this two-step approach to pricing. Strategically re-thinking your Price Pricing is one of the most critical elements of business success. How much is a good or service worth? What is a fair price for a particular good or service? Selecting the best pricing strategy for your product is key. Because price is a highly visible element in the service parts industry, competitive pricing data is easily accessible to your buyers and to your competitors. Additionally, different pricing strategies should be employed at different times to align with changes in business objectives, market conditions and product life cycles. As a service parts supplier, choosing a pricing strategy requires you to carefully consider your objectives and goals; the past, present and future state of the global market; your products; and your competition’s product and prices. While an overwhelming number of our survey respondents reported using cost-plus or market- based pricing (see Fig. 5) — more than two to three times more often than other pricing strategies — the average respondent still rated their pricing maturity as slightly better than average. With so many pricing strategies available, in order to move beyond being “average,” do you need to re-think your pricing strategy? Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1110 is cost-Plus costing you? Determine the cost associated with producing a service part, determine your desired margin, add the two numbers together and you have your price. Cost-plus pricing is a relatively easy strategy to implement, which may explain why more than 75 percent of our respondents already have; however, more than 30 percent of our respondents also recognized cost-plus pricing as problematic (see Fig. 2). As a result of the recent past and near term horizon, service parts suppliers have become leaner and more efficient by rationalizing capacity and production. While management has focused on understanding, restructuring and managing costs, the expected result would be positive near-term influence on corporate margins. Unfortunately, this has not been the case with an industry-norm cost-plus pricing strategy. 0% 20% 40% 60% 80% Exchange Rate Elasticity Market-Based Cost-Plus List Price Optimization Arbitrage Dimensional Figure 5: Y-axis is pricing strategy utilized X-axis is percentage of customers using the strategy Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1110 tired of not making “cents” of the market? Market-based pricing strategy uses competitors’ prices taken from market research, competitive intelligence and websites to calculate a market-based price. Service part companies can then set pricing at a positive or negative differential to that price. While simple in nature, this pricing strategy is viewed with skepticism. This is because having enough meaningful data — the lack of which was one of the top business problems reported by our survey respondents — is at the very core of market-based pricing. If applied properly, if the market is right and if the data is accurate, competitive market-based pricing can be useful. But there are a lot of “ifs” to address with using this strategy. There is an old adage: If if was a skiff, we’d be going for a boat ride. Are you a service parts pricing professional or a boat captain? Become Better than Average In light of the reported business problems, current application of technology, and the limited implementation of diversified pricing strategies, could being “average” be the best that service parts companies can achieve? The industry has changed, and service parts organizations are requiring a new approach to business practices, including more strategic use of the most powerful lever of all -- pricing. But to do so, business processes must be broken down and rebuilt, new technologies leveraged, and a new approach to pricing must be considered. “NEW INITIATIVES ARE BEING PURSUED AMONG ENTERPRISES FOR IMPROVING MARGINS AND REVENUE, INCREASING RESPONSIVENESS TO MARKET VOLATILITY, AND EXTRACTING GREATER EFFICIENCIES AND IMPACT FROM PRICING ACTIVITIES WITHIN SALES AND MARKETING PROCESSES.” – Michael Dunne, A Senior Vice President at Creative Executions Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1312 Where do you go from here? PROS believes that, as a service parts company, you not only can become better than average, but you also risk sacrificing your market share if you don’t. By succinctly addressing each of the leading business challenges impacting your business, you will strategically position yourself to outperform your competition and drive your profitability. While your “jumping off” point will depend on your individual company’s goals and objectives, the responses culled from our survey support our belief that everything starts and ends with meaningful data; manage that, and you will be well on your way. To further help guide you, we propose the following steps: • Leverage the power of big data, inclusive of competitive information, thereby increasing your sales and profitability through better pricing. • model different pricing strategies and compare forecasted results to accomplish business goals. • Provide a single system to set and manage global prices with visibility into different global channels, regions and international risks (e.g., grey market and exchange rates). • Provide visibility and comparison on the impact of promotions, concessions and complaints on your company’s margin and profitability. • establish an integrated parts pricing workflow with prioritization and KPI measurement, enabling you to quickly compile and publish parts price lists. Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1312 What Better than Average Looks Like Imagine, as a price manager, you have the ability to estimate the value that buyers actually put on products versus what they might currently be paying. Your pricing system dynamically examines a history of transactions and optimizes prices as data pours into the system. Operating at a highly granular level, buyer by buyer, product by product, the system makes a value-based pricing approach possible. Such pricing insight ensures your company is able to gain and sustain a competitive advantage. Imagine your sales force has the ability to improve its win rate, leave less money on the table, and have a more effective selling capacity. Your sales teams has access to critical information, including active sales leads, pending work items, email, alerts, price approvals, work documents and the customer relationship management pipeline, all from within familiar user interfaces that have been tailored to their specific business role and connected to market and company data sources. Sales professionals can initiate price and quote requests and receive a scientifically-generated price recommendation for their customers. By leveraging the power of informed pricing, coupled with familiar and easy-to-use tools, your sales team is able to drive improved financial performance and more fully realize your company’s market potential. Imagine that you are closer to the top than simply average. Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry 1514 Sean Duclaux serves as PROS Service Parts Industry Marketing Manager, responsible for the development of the company’s go-to-market strategy, and positioning of its Service Parts pricing and revenue management product portfolio. Prior to joining PROS, Duclaux held leadership positions in enterprise software companies, including AspenTech, BMC Software and Empirix. Throughout his career, he has worked in diverse roles, from product management, marketing, program management, R&D and operations, where he developed a strategic vision to define market-focused solutions and executed go-to-market programs. Duclaux earned an MBA from the University of Houston; an MS in computer science from the University of New Orleans and a BS from Spring Hill College. Sean duclaux Pricing to Outperform: A Better than “Average” Strategy for the Service Parts IndustryPricing to Outperform: A Better than “Average” Strategy for the Service Parts Industry PB16 PROS Holdings, Inc. (NYSE: PRO) is a big data software company that helps customers outperform in their markets by using big data to sell more effectively. We apply 27 years of data science experience to unlock buying patterns and preferences within transaction data to reveal which opportunities are most likely to close, which offers are most likely to sell and which prices are most likely to win. PROS offers big data solutions to optimize sales, pricing, quoting, rebates and revenue management across more than 30 industries. PROS has implemented more than 600 solutions in more than 55 countries. The PROS team comprises more than 700 professionals around the world. To learn more, visit www.pros.com. About ProS ProS.com Copyright © 2013, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or for a particular purpose. We specially disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission.