In the run-up to the EPP Aftermarket Forum, I regularly ask practitioners and experts alike for their point of view on certain topics. Merab is always keen to share his opinion.
Expert Point of View:
Merab Dekano’s professional experience until now has been focused on price optimisation, price execution and price analytics. He has worked with multinational, national and regional companies alike (JCI, Bombardier, Caselex, Mobis Parts Europe, just to name a few). In his various positions, he has successfully led diverse pricing software implementation projects and it is in this context that he has agreed to strengthen the EPP team as senior project manager.
"I like very much the 'end of life end of profit' topic you raised. I myself have come across this dilemma:
(i) sacrifice margin by lowering the price of mature part numbers and hope you will sell more of them or
(ii) assume mature products are and will be in decline anyway, so raise the price; sell less but sell better.
There are mixed opinions on the market. It, however, boils down to two main arguments.
On the one hand, businesses sustain that if you do not lower the price of mature spare parts or accessories, you will virtually stop selling them, as 'old' car drivers will not even consider buying those spare parts at that 'normal' price from the dealers. As cars get older, their residual value plummets. So it is not 'justified' to spend much money on an old car.
On the other hand, some businesses assert that as cars get older, most of them get scrapped and as fewer units are in operation, aftermarket operators are no longer interested in offering such spares and accessories. Therefore, car parc is reduced, so is the demand and supply for spares and accessories for those particular models. Now, no matter how law your price for those spares is, you will sell only that much of them, since there are simply fewer cars on the road. Lower your price and you will get lower margin without any chance to generate any sales uplift. If you maintain or even increase your price for mature spare parts, you will sell the same quantity but with better margin.
I understand that this sounds controversial and highly unorthodox, but just imagine a one simple and quite realistic scenario. You are driving a car that is 15 years old. You do not feel like changing your car to avoid chunky investment. The car breaks down and it needs a fuel pump. Theoretically, you have the following options:
- Sell the car as it is.
- Go to salvage and get a used fuel pump.
- Get an aftermarket non-branded cheap low spec fuel pump.
- Go to an OEM dealer and have an original pump fitted.
There could be more options or sub-options, but these reflect the 'big picture', I presume. Now, in the real life, the following happens:
- To sell a 15 years old car that needs a fuel pump (and who knows what else), is fiendishly difficult, unless you almost give it away at ridiculous price. It does not seem to be very attractive option, unless you are planning to buy a new car and the dealer buys your old and broken car.
- To get a salvage spare for an old model is a daunting task; it requires time, a lot of time and a low of waiting. If you are lucky and you got the right spare, there is no guarantee the part will be in good workable conditions. Nobody, not even the dealer who fits the part is able to guarantee it will work properly. Potentially cheap but not very attractive option either.
- To buy a counterfeit spare for a car model that is on its last legs is nearly impossible, as supply must have shrunk following the lack of demand. Most likely you will never find a 'matching' part.
- This options looks like you will not pay a cheap price, but you just have no other reasonable option left. It will still be much, much cheaper than replacing your car.
Of course, in the real life spare parts like fuel pump may be common specs across old and new models. This story assumes they are not.
In the nutshell, your mature part that is in decline turns into a sort of captive parts; you sell it occasionally but last thing you want is to sell it at low price / low margin.
It would be interesting to listen to the opinion of other pricing professionals on the topic, if they could share their experiences. Looking forward to reading them in the comments section below."
Pierfrancesco Manenti leads the IDC Manufacturing Insights research practice in EMEA and is the global lead for the Manufacturing Operations Technology Strategies advisory service. In his role, Mr Manenti provides insights, consulting and advisory support to leading manufacturers and specialty IT vendors into the key challenges and trends affecting manufacturing industries, including Automotive, Machinery, Wearing Apparel/Fashion, CPG, and High-Tech – with a particular attention to the EMEA region. Among the process domain areas, Mr. Manenti specializes in Manufacturing Operations, Supply Chains, and Product Life-Cycle strategies.
