August 1, 2023 The Role of Dynamic Pricing in the Spare Parts Industry

To ensure efficiency and profitability in a turbulent economy, spare parts companies must embrace dynamic pricing strategies.

By Barrett Thompson

Since the onset of the pandemic, the supply chain has been shaken by disruption, inflation and other economic challenges. Global manufacturing prices have skyrocketed due to supply constraints, leaving consumer and commercial buyers searching for alternatives to buying new products. Manufacturers are feeling the pressure and have seen purchasing demand drop across virtually every industry. These supply chain pitfalls keep many manufacturing companies on their toes and simultaneously boost growth for companies that manufacture and distribute spare parts.

From the automotive industry to aviation and beyond, the turbulent economy has both consumers and businesses looking for ways to repurpose and extend the lifespan of their purchases.

For consumers, the trend of driving older cars for longer periods of time isn’t slowing down. According to IHS Markit research, the average vehicle age increased from 11.9 years in 2020 to 12.1 years in 2021 and is expected to rise to 12.6 years by 2025. The demand for used vehicles is also reflected in recent price increases earlier this year. As consumers hold on to their current vehicles for longer, the demand for spare parts subsequently continues to rise.

In the aviation industry, strong travel demand and supply chain disruptions have forced airlines to fly older planes longer. Spare parts aviation companies such as Raytheon have experienced increased demand –– from companies including Boeing Co and Airbus SE –– for high-margin, after-market services.

With this sudden increased demand, spare parts companies need a tech-driven pricing solution. Dynamic pricing — where prices can be updated in real time to match market conditions — is the best way to ensure your customers see prices that are relevant to market and channel conditions at any given point in time.

Traditional approaches to setting prices can make things worse when something happens that requires a price change. But dynamic pricing marries business strategy with technology to better serve customers. Companies that have implemented dynamic pricing become more responsive, automated and intelligent in pricing decisions and, ultimately, price execution. The resulting speed-to-market combined with scientific accuracy in all channels is a game-changer for B2B organizations.

Spare parts companies must embrace these strategies to intelligently take advantage of customer demand and ensure efficiency, profitability and continued growth.

Inflation has given spare parts companies opportunities to raise prices, but downward pricing pressure is a more likely approach as the market softens. Those that are prepared to bring down prices softly, surgically and strategically using a dynamic pricing solution –– while using price elasticity measurements to generate market-aligned pricing –– will best hold onto the margin gains of the past year.

An overreliance on legacy tools and processes — especially manual processes and general desktop tools such as Excel —chips away at B2B companies’ competitive edge and can hinder future profits. Such methods are outdated in today’s evolving market and cannot respond to inflationary pressures with the same precision and speed as dynamic pricing solutions. As the economy continues to fluctuate, frequent and competitive price updates must be powered by dynamic pricing.

Profiting from Inventory Management

Dynamic pricing algorithms can help spare parts companies better manage their inventory levels during inflationary times by adjusting prices based on product availability. This allows companies to reduce overstocking and avoid stockouts, which can lead to lost sales and customer frustration.

The main impact of dynamic pricing algorithms is to help spare parts companies better manage their profitability, especially in situations where you chose stocking levels based on a demand forecast that didn’t play out as expected. Adjusting prices based on inventory levels can give you a tactical recovery, which helps blunt the impact of potential overstock/stockout situations in the last mile of the supply chain. For example, lowering prices can help move out inventory you over-purchased, and it can help hang on to limited inventory to satisfy the buyer with the greatest willingness to pay.

Spare parts companies must consider a strategic approach to price shifts where smaller changes are implemented with agility and intention. Minor shifts that follow the market allow for more market share retention –– which proves valuable for revenue generation –– especially with recessionary times on the horizon.

AI-based price optimization can set market-aligned prices based on price elasticity measurements to reveal how price changes affect total quantity sold and, thus, profit. This allows prices to be centrally updated so that changes can be communicated and delivered to customers at the speed of business.

Putting the Customer First

Dynamic pricing allows spare parts companies to provide a better customer experience by offering competitive prices based on market fluctuations. With a customer-first pricing strategy supported by a dynamic pricing solution, companies can retain customer loyalty, ensure repeat purchases and remain ahead of the competition.

B2B companies are often tasked with managing customer price agreements. Managing and determining the profitability of the hundreds or thousands of customer price agreements within any spare parts company can become challenging. Dynamic pricing ensures that customers are supplied with market-centric-priced products and are automatically alerted when agreement renewals are necessary, when price updates are needed and when inventory runs low.

Strategic Pricing Built from Data

Legacy pricing is no longer capable of achieving financial milestones. Adopting a pricing strategy run on a data science-based approach can generate improved performance and profit for spare parts companies. Older pricing tactics don’t account for inflationary or deflationary market conditions, competitive dynamics, rapid shifts in inventory or customer relationships. Company success depends on an innovative solution such as dynamic pricing now more than ever.

Dynamic pricing analyzes factors such as customer demand, competitor prices and inventory levels. This automated understanding helps spare parts companies make informed decisions about their pricing strategies to fend off competitive intrusion and sell more effectively.

Dynamic pricing solutions respond well to market turbulence and allow spare parts companies to abandon manual, cumbersome methods. Companies should strive for a strategic, accelerated path to revenue growth based on metrics important to the company and its industry. A dynamic pricing tool enables companies to strategically align their pricing with industry norms and, more importantly, reveal how pricing shifts will impact margin and volume to secure a competitive edge.

Barrett Thompson is the General Manager of Commercial Excellence at Zilliant. He leads the Business Solutions Consultant team, aligning Zilliant’s solutions to customer needs and promoting pricing and sales best practices among customers. Over the past two decades, Barrett has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries, including building materials manufacturing and distribution, industrial components manufacturing, semiconductor manufacturing, office-supply distribution, hardware-software distribution, pharmaceutical and medical-device distribution, telecommunications, and multiple travel and transportation verticals.

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