Harnessing diverse challenges to optimize yields
The industrial goods and engineering market is facing a variety of challenges in the wake of globalization and digitalization: new growth markets, sustainability and decarbonization, Industry 4.0, the Internet-of-Things (IoT), emerging e-commerce in B2B, and many other changes require new business and pricing models.
Innovations driven by new growth markets and trend toward sustainability
The USA and Asia, in particular China, continue to be geographical growth markets for the industry. They are complemented by the European region, where the conversion of technologies is creating growing demand, for example in the field of robotics, which is in high demand in the DACH region. These are joined by industry-specific growth markets, such as the United Arab Emirates or Morocco for 3D printing. In addition to geographical growth markets, there are technological innovations that promise great potential as new sub-markets. For example, automation technologies, IT and connected devices form the basis for Industry 4.0 and thus open up new technological segments. In particular, the combination of conventional mechanical engineering know-how and IT skills, including artificial intelligence, is blurring areas of expertise and increasing the demands on personnel planning.
Increase innovation investments
The particularly rapid technological change will be accelerated once again by the trend towards decarbonization, so that companies will be forced to increase their innovation investments. In addition to the consumption and emissions of the machines used, packaging and shipping routes are also playing an increasing role. For companies, this means that in addition to the pressure to innovate, the complexity of the issue of sustainability is also increasing sharply. Customers are increasingly concerned with the ecological impact of companies and are incorporating this into their purchasing decisions.
In addition, there are regulatory levers that will force the industry to critically scrutinize its own environmental impact in the medium term anyway, if only for purely economic reasons. On the other hand, the trend toward ecological and sustainable technologies offers growth potential. Demand for environmentally compatible technology is rising, and innovative companies can play an advantage here. Accordingly, the turnaround is accompanied by high investment volumes. The pressure is being intensified by influences from Asia, where markets are becoming more mature and differentiated, while a lot of capital is being invested in innovations.
New opportunities through Industry 4.0
Service and software are playing an increasingly important role in the product portfolio of mechanical engineering and industrial goods companies. Like all sectors of the economy, mechanical engineering is strongly influenced by the megatrend of digitization, and as one of the industries with the highest research intensity, it is above average. Basic requirements here are the networking of production as well as plant sensor technology and remote maintenance. In the context of Industry 4.0, the digital twin, among other things, is playing an increasingly important role.
This is also where the Internet of Things (IoT) comes into play, enabling the networking of physical and virtual objects. This blurs the boundaries of the communication infrastructure and information from the environment is automatically registered, processed and forwarded. In this way, objects can communicate and cooperate with each other without human intervention, which can lead to significantly smoother processes. So-called “smart devices” form the basis of the hardware infrastructure, in the form of intelligent and networked devices, systems and machines. Accordingly, it will be important for companies in the industry to convert their infrastructure in such a way that synergies can be leveraged with IoT. In particular, the possible location-independent control of devices and machines can offer a competitive advantage here.
E-commerce as an opportunity and risk for industrial goods and mechanical engineering
E-commerce sales have long since ceased to be the exclusive preserve of B2C sales and are now also spreading rapidly in B2B. The focus here is less on a rigid digital sales structure, but rather on the development of fully comprehensive platforms that link purchasing and sales with the production process. For example, by using digital twins and IoT, prices can be calculated for products that do not yet exist. The networked production facilities use simulations and models to return data on whether and with what effort the production of a particular product is possible. For pricing, this means that production costs can be determined before a physical object has even passed through the production process. Quotations can thus be created quickly and easily. In addition, the quotation portfolio can be expanded as required within the scope of the capabilities of the machines used. Purchasing can also be automated, at least for series parts, and idle times can thus be further minimized.
New machines often represent a technical innovation on the market. The company’s research and development has done a great job, but the sales department lacks a clear value-added argument and value-based classification in the competitive context. So, at what entry price should the machine be offered?
The price of the predecessor model is often chosen as the answer to this question. This is not the only reason why the margin level in the new machine business often leaves much to be desired: negotiations with the customer revolve primarily around the price factor and additional discounts. The sales team lacks sales material and negotiation training to withstand the headwinds of the buyers and push through an attractive price on the market.
Pricing solution for new machines
As a solution, it is advisable to develop systematic pricing for innovative new machines that optimally skims off the customer’s willingness to pay. This can be achieved by strong modularization, in which features or performance packages with clear added value are bundled. The added value of the individual modules is evaluated in detail in terms of customer benefit and priced as a package. In this way, increased output volumes or reduced downtimes can offer added value that far exceeds the necessary cost increases. This value pricing should be accompanied by powerful sales material and a well-trained sales team so that the customer understands the added value for his own company in detail.
Aftersales / Spare parts
The new machine business is joined by the sale of spare parts. It is not uncommon for the spare parts portfolio of companies from the industrial goods market and mechanical engineering to comprise several tens of thousands of parts. This is exacerbated by high competition for purchased parts and increasing price pressure from third-party suppliers. There is also uncertainty about the right pricing methods. In which product categories is it worthwhile to base prices on competitive prices? Where can I decouple my pricing from my costs in a largely value-oriented manner?
Many companies react to the high level of complexity with manual work and complex Excel models, which, however, cause a high expenditure of time and are also extremely error-prone. In addition, the necessary differentiation of prices suffers as a result of the simplification in pricing, which is nevertheless unavoidable. The emergence of e-commerce in the B2B sector is exacerbating the problem by increasing price transparency. Customers, especially those with an international presence, often request prices from several national companies of the same company at the same time and sometimes receive widely differing offers. In the medium term, the price image of the entire company suffers as a result.
In addition to the machine and the associated spare parts, many companies also offer supplementary services. Over time, many manufacturers have realized that, like spare parts, their sales cannot function without their own structures and appropriately qualified personnel. This is particularly true for digital services, which only a few veteran machine salespeople are enthusiastic about actively selling.
In addition, services have historically often been free of charge for many customers. Accordingly, the company’s own sales team is often very resistant to new offers and to the separate pricing of these services, which were all too readily used as bargaining chips in the past. Pricing and the sale of digital services therefore present companies with new challenges, including personnel and organizational ones. Another complicating factor in pricing is that manufacturers are used to dealing with classic, “touchable” products. With “non-tangible” digital products such as software, on the other hand, the variable manufacturing and purchasing costs on which previous pricing was often based no longer apply.
Successive topline optimization with integrated solutions
New machines from leading suppliers are often introduced to the market as innovations. The added value provided by the innovation must be systematically recorded and communicated to the customer. Specially adapted pricing methods, such as a PASST tool developed by us, can be used to determine the optimum price with a view to optimizing sales and profits. Tools such as the Economic-Value-Add method are also suitable for determining the additional value of the new machine compared to a competitor or predecessor model.
CPQ and Value Selling
In the case of configurable new machines, we work with our customers to develop feature or performance packages that can be added as options to a price configurator. Ideally, this is integrated into existing sales platforms such as the CRM as part of a CPQ solution (Configure-Price-Quote). This allows the salesperson to determine prices for different configurations on site at the customer and to show the respective added value.
The latter should be supported by various value selling tools, which must also be available on a mobile basis. In numerous projects, we have therefore worked with our customers to develop a comprehensive set of methods for active sales. This includes, among other things, elevator pitches, battle cards, reference cases, and value-added calculators, which can be used to quantitatively demonstrate the advantages of the options to the customer during the sales pitch. Sales training courses, which we also offer as e-learning, are suitable for ensuring the successful use of the various tools.
Aftersales / Spare parts
Many companies continue to focus too much on the new machine business, while the spare parts and service business tends to be overshadowed by primary sales as an essential profit lever. Both the sheer number of spare parts and the sometimes thin personnel cover as a result of the shadowy existence of aftersales are reflected in an approach to sales that is often too reactive. Spare parts are not actively sold, but only existing demand is met. This is particularly true for smaller suppliers who have not yet established service sales as an equal sales organization alongside primary sales. Here, it is important to act promptly and lay the organizational foundations for successful service sales. In the spare parts business in particular, it is difficult to win back customers who have in the meantime turned to specialized parts dealers.
Pricing in the spare parts business
Price management in the spare parts business is also an important sales aspect. Here in particular, several goals can be achieved simultaneously through pragmatic approaches:
- Yield increase of two to four percentage points
- Increasing sales in highly competitive product groups
- Improving customer satisfaction and price image
- Reduction of manual pricing effort and error reduction through automation
For this purpose, heuristic methods for pricing standard spare parts are recommended, which provide the spare parts with a price in an automated and cost-related, but at the same time value-oriented manner.
Smart pricing tools
These methods can be supplemented by advanced methods for specific product groups. For example, competitive prices can be systematically collected and integrated into the pricing logic, or fully value-based pricing methods can be implemented for selected product groups. After prototypical testing of a new pricing logic, it is recommended to implement dedicated pricing software as well as self-service BI dashboards for analytical controlling of the spare parts business. We have implemented our extensive expertise in spare parts price management in our pricing software nueprice.
The distribution and pricing of services, especially digital services, is sometimes very different from the methods used for physical products. In pricing, the costs of hybrid services must first be determined. It is often helpful to set up detailed cost prices for the individual services and to sensitize the sales department to the need for price implementation. This creates an awareness of the value of the services.
The second step is to quantify the added value of the services for the customer. What added value does this service generate for the customer? What alternatives does he have? Advanced methods include service contracts, bundling of different services with each other, and also bundling of services with a new machine sale. For digital and hybrid services, we have developed a standalone pricing framework to systematically meet the high demands on pricing models for the new offerings. This framework can be and is already being used in numerous companies to design new pricing models. It contains clear guidelines for pricing Software as a Service (SaaS) and all conceivable hybrid solutions.
Experiences and project examples
Prof. Roll & Pastuch – Management Consultants has extensive experience with industrial goods and in mechanical engineering. In various projects, Roll & Pastuch has been able to support companies in solving the complex challenges described and implementing holistic approaches. The focus of our projects in this industry includes the following topics:
- Structure Service Sales
- Potential-oriented service and spare parts sales
- Pricing of innovative new machines
- Conception of new business models such as Equipment-as-a-Service
- Go-to-market strategies for innovations
- Development and introduction of value selling methods
- Sales & negotiation training in the context of Value Based Selling
- Systematic pricing of (digital) services and hybrid offerings
- Spare parts pricing and its automation
- Pricing software selection and implementation support
- Use of AI (artificial intelligence) in controlling
Exploit your earnings potentials
We recommend tackling the many tasks step by step. In our projects, we present a detailed roadmap for achieving sales and pricing excellence through a holistic solution. By successively optimizing the pricing and sales of new machines, spare parts and services, significant earnings potential can already be leveraged during the improvement process. This approach ensures both a high level of acceptance within the company and the financial viability of the project.
Prof. Dr. Oliver Roll is Chair of “International marketing and price management” at Osnabrück University of Applied Sciences. He is a member of the European Pricing Platform’s Academic Advisory Board. Prof Roll gained extensive management experience at Simon-Kucher & Partners, before moving to Roland Berger Strategy Consultants to establish their Pricing Excellence Unit. He has managed marketing and pricing projects for numerous international companies. Prof. Roll also speaks at various management conferences on the topic of price management, and has published numerous articles concerning different aspects of the pricing process.
Kai Pastuch is Managing Director of Prof. Roll & Pastuch – Management Consultants. Before joining as Managing Partner, he was Director at a leading international strategy and marketing consultancy. As a graduate in business informatics, he also manages our software company nueprice, which specializes in the pricing of spare parts with the product of the same name. Mr. Pastuch has extensive project management experience from numerous projects for large international companies and German medium-sized businesses in the areas of price management, marketing, sales and strategy. In addition to numerous publications in renowned journals and the publication of the reference books Praxishandbuch Preismanagement and Big Deal Management, he is a sought-after moderator and speaker on all aspects of sales and pricing. As a practice-oriented manager, he likes to get personally involved in our projects and contributes his broad experience in workshops and steerings.