Service pricing strategies in maintenance services

Service pricing strategies in maintenance services

23rd EurOMA Conference, Trondheim, Norway

20 June 2016

Dr Shaun West, Dr Philipp Schmitt, Dominik Kujawski

23rd EurOMA Conference | June 2016 |West, Kujawski & Schmitt

HistoryPricing and value are not new problems!


IntroductionThe problem and the purpose of this paper

To highlight difficulties and provide guidance and understand how pricing influence customer value

This pricing pressure in the market confirms the need to focus on customer value when pricing due to changing buying behaviors

To identify and describe complexity of maintenance pricing models

Purpose of this paper

Price pressure has been increasing due to changes in buying behaviors

Problem


IntroductionWhy is pricing important?

What is important when pricing services?-‐ Offering higher value added products and services-‐ Offering services and solutions -‐ Rethinking pricing strategies-‐ Setting the right price-‐ Capturing customer value

Pricing is a key part of the business model and impacts many different areas

“manufacturers should price their most advanced service offerings according to value-‐,

rather than to cost-‐ or competition based strategies” (Rapaccini 2015)


BackgroundPricing is the most powerful tool in the marketing toolbox

What does the literature tell us?-‐ Pricing has a huge impact on the financial results-‐ Pricing is a multi-‐department activity-‐ Services are often given away free-‐ Services firms need to adjust their revenue models-‐ Manufacturers find it hard to change pricing models

It is importing to develop pricing objectives, strategies and tools to help support new pricing models


BackgroundValue as a fundamental of service pricing

What does the literature tell us?-‐ That buyer’s choice is dependent on price is an oversimplification of the problem

-‐ Pricing has an impact on customer satisfaction-‐ Pricing for services is dependent on situations-‐ Pricing must reflect functional and emotional aspects-‐ Pricing and service scopes are related

The use of value must be a central aspect in the pricing objectives

“What is the difference in worth of the two offerings to my firm, and how does it compare

to the difference in their prices?” (Anderson et al, 2009)


BackgroundPricing objectives are the basis for profitable decisions

What does the literature tell us?-‐ Pricing objectives are quantitative and qualitative

-‐ Sales, profits, market share…-‐ Relationships, competitors…

-‐ The objectives must be understood within the firm

The objectives of pricing lead to different operational pricing strategies within the organization

”…objectives of pricing are to determine which pricing strategy will be the basis for profitable decisions as a result of company’s overall

strategy” (Hinterhuber, 2003)


BackgroundPricing strategies are influenced by internal and external factors

Cost plus -‐ Easy to use-‐ Supplier does not understand customer value-‐ Can provide the customer with poor valueCompetition/market base-‐ Pricing is controlled by the market-‐ Supplier does not understand customer value-‐ Value capture can be lowValue based-‐ Customer value is the driver for the price-‐ Supplier understand customer value creation-‐ Supplier measures margin at the end of the provide

Pricing tools are needed to support the pricing strategies

Scope Cost Margin Price Value

Cost plus

Competition/market base

Scope Cost Market Price Value

Value based

Value Price Scope Cost Margin

SupplierCustomerMarket


BackgroundPricing tools and methods

What does the literature tell us?-‐ Three categories for service pricing methods: cost based, competition based, and demand based

-‐ Pricing methods: negotiated pricing, pure bundling, trade discounts, efficiency pricing, cash discounts, and bundling

-‐ Different pricing tools required to support the pricing methods

Correct pricing levels help firms to boost there sales and margins

”…empirical research on pricing methods is extremely limited” (Avlonitis and Indounas

2005)


MethodologyA two step methodology was applied in this study

Interviews • 6 senior managers • End-‐to-‐end sales process• Personal contact• Different industries

Cross case analysis• Direct comparison• Different revenue models• Different service offers • Compared with B2C base


Results and analysis Overview of the companies

Companies described according to: description, market, category, size and selling channels

OEM/SME – Firm 1• Hardware/software• Industrial refrigeration• Equipment indirect/Service direct

Aftermarket/Large – Firm 2• Full service provider for propulsion systems• Marine• Service direct/Agents

OEM/Large – Firm 3 • Power generation equipment and services• Power Generation • Equipment indirect/Service direct

Aftermarket/SME – Firm 4• Service provider for rotating equipment• Maintenance services• Service direct/Agents

OEM/Large – Firm 5 • Equipment and services for textile systems• Textiles• Equipment direct/Service direct/Agents

OEM/Large – Firm 6 • Turbomachinery equipment and services• O&G, industrial Power• Equipment direct/Service direct


Results and analysis Pricing objectives -‐ top 4 confirm missing customer orientation

Key findings-‐ Supplier focused-‐ Financially based: margin optimization, stability, sales, overhead recovery

-‐ Strong affinity to the cost plus basis of pricing-‐ None mention that optimal pricing is a key part of maintaining customer relationship

-‐ Firm 3 had the best defined pricing objectives

The basis of pricing objectives were inward looking rather than customer

Competition-‐related pricing

Service quality-‐related pricing

Stability in the market

Financial objectives (in general)


Results and analysis Pricing strategies -‐ top 4 showing cost plus basis to support pricing objectives

Key findings-‐ Popular strategies

-‐ Market-‐based/competition based-‐ Cost plus pricing plus with performance measures

-‐ Firms had limited consideration of customer value-‐ Price was used to measure customer value-‐ Firm 3 had the most comprehensive pricing strategy-‐ Too few firms focused on customer value

There were gaps in the pricing strategies in most of the firms interviewed

Market based

Cost plus

Customer value

Willingness to pay


Results and analysis Pricing tools -‐ top 4 showing attempts to identify customer value

Key findings-‐ All firms applied market benchmarking, cost build up, and bundling

-‐ Benchmarking was a direct comparison with the competition

-‐ Trade discounts often provide a 'feel good', although do not directly reflect customer value creation

-‐ Bundling extend the model to do-‐it-‐for-‐me, do-‐it-‐with-‐me and the extreme do-‐it-‐yourself

-‐ Limited customer segmentation does not help price optimization

There were gaps in the pricing strategies in most of the firms interviewed

Cost build up

Trade discounts

Customer value

Willingness to pay


Results and analysis of the studyPricing tools and methods – basic tools and their use

Key findings-‐ Cost based

-‐ Cost build-‐up supports financial objectives-‐ Discounts general are reflected in margins-‐ Price lists are often cost plus based

-‐ Market based-‐ Benchmarking supports consistency in the market

-‐ Historic data support consistency in prices-‐ Value based

-‐ Negotiations help to identify customer value-‐ Sales managers are poorly used

Basic tools are generally supporting the financial pricing objectives

Tool Method PopularityMarket benchmarking Market HCost build up Cost HNegotiated pricing Value HDiscounts Cost HHistoric Market HPrice lists Cost/Market MSales manager Market/Value L


Results and analysis of the studyPricing tools and methods – advanced tools and their use

Key findings-‐ Cost based

-‐ Cost models are the basis of margin forecasts-‐ Market based

-‐ Demand/capacity pricing creases market singles-‐ Value based

-‐ Bundling supports customer value discovery-‐ Willingness to pay indicates customer value-‐ Capacity pricing supports internal value-‐ Revenue models support customer value-‐ Performance modelling/payback and value in use all measures customer value

Not all of the firms have the tools to support value-‐based pricing

Tool Method PopularityBundling Value HWillingness to pay Value HCost/revenue models Cost/value MDemand/capacity based pricing Market/Value M

Performance modelling Value LValue in use Value LPayback/ROI Value L


Results and analysis of the studyThe key observations from the analysis were

Findings confirmed that pricing of services is complex:-‐ Different pricing models help with margin optimization-‐ It was hard to move away from a cost-‐plus model-‐ Firms had a desire to move to value-‐based pricing but were unsure of the implications

-‐ The buyer might be more advanced in pricing model innovation than the seller

-‐ Pricing also provides a focus on measuring customer value

Within a firm there should be an alignment between the pricing objectives, pricing

strategies and tools. “Such tools are needed to create a value based pricing model.”

Anderson et al. (2009).

Firms are not using information that could help them to identify the customer value


ClosingConclusions

There is a need to focus on customer value creation during pricing by aligning pricing tools, strategies to support firms pricing objectives

Pricing services is challenging due to a large number of dimensions

Pricing was treated more as a cost-‐plus calculation

Many firms had unclear pricing stratergies

Pricing objectives and tools in line with pricing strategy is critical


ClosingRecommendations

Determining the right steps to improve co-‐creation of value with the customer could allow improving pricing strategies

Research into pricing dimensions impacts on pricing objectives

Additional insights and surveys to understand different segments

Identification of the most effective pricing tools

Best practice roadmap to improve value-‐based pricing


DraftInitial prototype: value-‐based pricing using many inputs to identify the ’fair-‐price’

Triangulation of value-‐base pricing based on the data and analysis: market, internal and customer

cost build-‐up

Total value delivered

Benchm

ark price

ßPains

value-‐based price

Value

share?

Willingness to pay region

Cost build-‐up

Gains à

Margin

Price paid (features )

Tangibles

Intangibles

Goods/services

Gain makers

Pain relievers

Margin

Top line

Sustaina-‐bility

Bottom line

CustomerMarket Internal Value Internal

Thought: working to reduce pains could lead to increased price


Thanks for your time!

Business

Service pricing strategies in maintenance services