Aeroconsult – Experience, Insight, Credibility & Innovation

PRICING MODELS

Getting pricing right is not a simple matter. It requires an understanding of both the specific market dynamics and demand characteristics + what the prevalent pricing strategies of the competitors/market leaders are.

The following 3 examples illustrate some of the complexities involved:

1. Getting the OEM/aftermarket pricing relationship right

Make sure you get the relationship between your OEM pricing and aftermarket pricing right the first time. Be especially careful with components where software development represents a significant share of the development costs – think of the entire product in ”component” terms, not hardware and software separated. Also, be careful to include all service delivery costs associated with supporting the product technically and commercially in the aftermarket, as these costs can be very signficant.

2. Price sensitivity as a function of complexity

Price sensitivity is closely linked to the complexity of the product offer. Be sure to understand the product your company sells – is it a single physical component, or is it a complex solution made up from a combination of physical products and services. What does the competitive landscape look like, and do you have a detailed understanding of who your competitors are – or where new opportunities lie?

As an example we worked with a large aerospace distributor. The culture internally in the organisation was to think of their product offer as made up of individually sold components, with close to 100% market-dictated and transparent pricing – all of which effectively limited the company’s ability to influence its own profitability.

Together we developed a completely new expanded product/service offering, positioned slightly differently than the company’s core business, but solving some real problems for the customers . This enabled us to adopt a value pricing model, which today contributes significantly to the company’s profitability, and now represents close to 25% of the company’s total sales.

3. Differentiation

In our experience, companies either do not differentiate between their customers at all, or they ”over-differentiate” using highly complicated models, which sometimes nobody in reality understands.

Differentiation between different customer segments can be a powerful tool to optimize profitability, but to do it right you need a helicopter perspective on your business, and a detailed understanding of the customer demand drivers.

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