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The Winning formula of Advanced Service Contract Pricing for OEMs

Updated: Oct 12, 2023


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Pricing Advanced Service Contracts for #OEMs is no easy task, as it involves juggling multiple factors such as the scope of services, contract length, equipment complexity, customizations, geographic location, competition, risk factors, Service Level Agreement, market conditions, and the pricing model itself. Mastering this complex landscape can be as challenging as solving a Rubik's cube blindfolded!

To help you in navigating the world of advanced service contract pricing, let's first dive into the top pricing techniques that can propel your business to new heights.

 

Top Pricing Strategies for OEMs

  1. #CostPlusPricing: This classic approach involves adding a fixed profit margin to your costs. Think of it as the fast-food of pricing strategies - it's familiar and ensures that your costs are covered. However, it may not account for customer value or the competitive landscape, potentially leading to overpricing or underpricing. So, while it's a reliable option and can be used as a backup strategy, it might not always be the best fit for every situation.

  2. #MarketDrivenPricing: Aligning your prices with current market rates for comparable products and services is like hitting the dance floor at a party - you're following the tempo set by others. This approach can help you maintain market share and customer retention, but beware of potential dance-offs, as it can also spark price wars, eventually eroding profits.

  3. #ValueBasedPricing: Focusing on customer needs, preferences, and value perception, this strategy is like tailoring a bespoke suit. You differentiate your prices based on the provided value, creating a unique fit according to the perceived values of the offering, whether it’s a product or a service. The challenge lies in understanding customer needs, measuring the fabric of their preferences, and effectively communicating the value proposition.

  4. #PenetrationPricing: By setting low initial prices for new products or services, you can quickly gain market share and attract customers, much like holding a grand opening sale for a new store. However, be aware that this strategy may result in lower initial profits and potentially damage your brand's reputation, just like a store that becomes known for bargain-bin quality. Besides, raising the prices later can be a daunting task, which may need introducing additional value to your offerings, potentially increasing your costs.

  5. #DynamicPricing: Adjusting prices in real-time based on factors like demand and market conditions is like surfing the waves of opportunity. This technique allows you to capitalize on opportunities and respond to changes quickly, making you the ultimate pricing surfer. However, to ride these waves, you'll need advanced technology and data analysis capabilities, so make sure you're well-equipped for the challenge.

  6. #PremiumPricing: This approach involves setting prices higher than competitors to create an impression of exclusivity, luxury, superior quality, or exceptional service. This method is suitable for high-end products or services that target customers who are willing to pay extra for premium features, exceptional quality & service, or an enhanced brand image.

  7. #EconomyPricing: In contrast to premium pricing, economy pricing focuses on setting low prices for products or services to target cost-conscious customers. This strategy often involves minimizing production and marketing costs to maintain profitability while offering low prices. Economy pricing is typically used in highly competitive markets where price-sensitive customers prioritize affordability over features or quality.

  8. #BundlePricing: This method involves offering a combination of products or services together at a discounted price compared to purchasing them separately. Bundle pricing can encourage customers to buy more items or services, increase perceived value, and strengthen customer loyalty. It is effective when businesses have complementary products or services that customers are likely to purchase together.

  9. #SkimmingPricing: Skimming pricing is a strategy where businesses initially set high prices for new products or services and gradually lower them over time. This approach aims to capture early adopters who are willing to pay a premium for innovation or exclusivity. As the market matures and competition grows, prices are reduced to attract a wider customer base. Skimming pricing is often used for innovative products and services or in technology-driven industries.

  10. #PsychologicalPricing: This approach involves setting prices based on the perception of the price rather than its actual value. One common example is setting prices just below a round number, such as $9.95 instead of $10 or €999 instead of €1000. Psychological pricing takes advantage of customers' cognitive biases and emotional responses to make prices appear more attractive, thus more used in the B2C than in B2B.

  11. #PromotionalPricing: This approach involves offering temporary price reductions or special offers to boost sales, increase market share, or achieve other business objectives. Promotional pricing includes tactics such as discounts, rebates, and buy-one-get-one-free offers. This approach can be effective in driving short-term sales, attracting new customers, or clearing inventory (in terms of products) but should be used wisely and with caution to avoid negatively impacting the brand image or long-term profitability.

 

Finding Your Perfect Pricing Strategy

Now that we've explored these pricing strategies for OEMs, you might be wondering if they can be applied to service pricing as well; and if so, when and how? The answer is of course a resounding "yes they can be applied!" With minor adjustments to accommodate the unique nature of services, these strategies can work just as effectively in the realm of service pricing. However, you may need to modify them and sometimes combine them with other marketing strategies in order to get a better pricing strategy for services as a result. Here's a glimpse at how each strategy can be adapted for services:

  • Value-Based Pricing Combined with #CustomerSegmentation, Taking Advantage of Premium and Economy Pricing Strategies: Focusing on customer needs and preferences, value-based pricing is like tailoring a bespoke suit. You differentiate your prices based on the value offered by your services but consider the customer segments to assess the perceived value, creating a unique fit for each customer segment. For example, you can use premium pricing for a high-quality, comprehensive outcome- or performance-based service contracts targeting customers who prioritize top-notch service and are willing to pay a higher price for seamless business performance. On the other hand, you can use economy pricing for basic, low-cost service contracts like simple repair & maintenance, catering to cost-conscious and price-sensitive customers who prioritize affordability over comprehensive support. The challenge lies in understanding customer needs, measuring the fabric of their preferences, and effectively communicating the value proposition - so sharpen your scissors and get ready to cut through the noise!

  • Increase Revenue and Enhance Customer Loyalty with Bundle Pricing: OEMs can create bundled offerings by combining service contracts with other products or services they provide, such as equipment purchases, software subscriptions, or training. By offering these bundles at a discounted price compared to purchasing them separately, OEMs can encourage customers to sign up for more services, and potentially increase the presence of the OEM in the customer's business operations, transferring the relationship into a more robust partnership, thereby increasing revenue and enhancing customer loyalty.

  • Combine Market-Driven and Psychological Pricing to Drive Customer Behavior: Aligning your prices with prevailing market rates for similar products & services is essential. By analyzing competitor pricing for similar services and using tiered pricing structures, you can leverage B2C psychological pricing tactics in the B2B world by driving your customers' behavior and encouraging them to opt for specific service offerings. For instance, you can offer various but limited bundle services at different locations and countries and price them in a way that psychologically drives customers towards specific service bundles that your service team has a higher margin or better capacity to offer and provide in that specific location or country.

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Each pricing strategy has its pros and cons, and the optimal choice depends on your specific situation and the market conditions. It's like choosing your ideal vacation destination - what works for one person may not work for another. By implementing the right strategy, you can enhance profitability, customer satisfaction, and market share for your business. All of these pricing strategies can be applied to both product and service pricing, offering OEMs a versatile toolkit for tackling any pricing challenge. By selecting the right strategy based on your industry, business goals, customer segments, and market conditions, you can enhance profitability, customer satisfaction, and market share in your respective industry.

So go ahead, take these strategies for a spin, and watch your business thrive! And of course, as always don't hesitate to reach out in case you need support or have questions in this regard. We have a team of the best industry experts to support your pricing tasks!

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