Well, hello and thank you all again for tuning into another episode of Professional Pricing Society Podcast. My name is Terrence and before I introduce our guest today, I want to remind everyone that we have a conference coming up. October 10th through the 13th will be holding our Fall Spring Pricing and Workshop conference in Atlanta, GA And if you are interested visit our website pricingsociety.com. Now we have a new guest with us today by the name of Tim Geyer.
Tim is a North American leader of a software development company called Market Pilot and he brings to the US market best practices from over 100 different European manufacturers to share with equipment manufacturers across the US and Canada. Tim also is going to be speaking with us in Atlanta during our conference. He has a speaking session called Rethinking Cost plus the journey to market based pricing. Tim, how are you doing today? Doing well. Thank you very much for having
me today. Thanks so much for being here. I appreciate your presence. Let's go ahead and just jump right into this conversation rethinking cost plus Now you are based in the industry of manufacturing. How does market based pricing help machine manufacturers stay competitive and maintain profitability? Great question in a couple of ways, Terrence, so.
We really are advocates of market based pricing in today's digital environment because we firmly believe that cost plus pricing doesn't work anymore because there's so many competitors out there, right. The competitive landscape is so intense for most manufacturers. So market based pricing really helps them stay competitive and also not only maintaining but even increasing profitability in four ways. The first one really is that market based pricing reflects
real time value, right. So market based pricing make make sure that pricing aligns. With what the market, what the market and your customers are really willing to pay rather than just looking at your costs, what the most traditional and most basic basic pricing strategy is? The 2nd way is that it responds to competition of course, right.
So you really have a good overview of what your competitors in the market are doing, especially when you're not offering a very differentiated product and there's a lot of either knockoffs or will fit components or something like that. And then it's. Very in a very important to get a handle on what your competitors offering in terms of pricing and of course the 3rd and main, I think it's the most important reason for me personally and for the companies that I work with is that it
really drives profitability. So ensuring prices are or ensuring the prices are set based on the market demand really helps capturing the maximum value from each part or from each component that you're selling versus just. I know we're just applying a standard markup what most companies are still doing nowadays, which is crazy. And then the last point really is when you have a good handle on what your competitors are doing in the market, it's really
incentivizes innovation. Because seeing what your competitors are doing and being very proactive and diligent about it really helps you predict shifts in the market and in the market demand and in what customers really want and need. So it even helps in. In terms of product innovation, which might sound a little odd at first, but it is a benefit that is cool, very cool, Okay, four different components to kind of help you all stay ahead of the game.
Now, how does a market based parts pricing strategy differ from traditional cost plus pricing for machine manufacturers in your eyes? Well, the most obvious one is the foundation, right. So cost plus pricing, obviously it's based on either production costs or purchasing costs with some sort of markup depending on for example, how critical or how complex a certain part or component is. Market based pricing, you did you differently.
You set your pricing according to market demand and competitor prices. And of course you still have to make sure that you hit your margin goals, but there's in many cases there's. Certain leeway or certain opportunities to increase prices further and for some parts you might even have to cut your margins to stay competitive
within the market. So one stat here maybe that's really interesting is I worked with about 150 Oem's now across North America and Europe. And on average we see that only about 4.1% of the parts in their portfolio are priced at market, which we define at deviating. My 5% either higher or lower from the median market price and all the other 96% of parts are either underpriced or overpriced, which blew my mind when I first saw it, but that's the reality out there. Wow. Wow.
It's that steep. It really is. And that's why, I mean, there's huge profit growth opportunities there, right, for the underpriced parts, specifically when you're a trusted brand in the market, you're the OEM, you invested a lot into your brand and into your end user customer relationships and you should never be. The, let's say the cheapest vendor in the market, that
should never ever happen. So there's crazy profit opportunities in just increasing your prices to the market level and your customers, they won't be scared off because you're still very much in line with the market. So that's really the beauty of market based pricing. And the last factor here, how it how it differs. It just makes everything a little bit more flexible, right? Because you don't just reactively adjust your own prices to how your costing increases when your suppliers.
Increase their prices because of raw material shortages or something. We've seen all kinds of supply chain craziness over the last years, as you know. But you can be more proactive about it and more deliberate because you can see very early on how the market shifts and then you can proactively adapt your pricing strategy according to that. Good.
That's awesome. Well, yeah, market based pricing is one of those, one of those strategies and approaches to pricing that in your opinion, I mean based on your history it seems to I guess if you can plan ahead, it works as best as it can because everything is at market value.
So the 4% at market value when the rest is 9596% over above, that's mind blowing to me. But hey, let me ask you this, what are the benefits of using market based pricing in a dynamic industry with a fluctuating supply and demand for machines? Well. The most obvious benefit is just being more, more agile, right, Not being as reactive as I mentioned before and allowing manufacturers to quickly adjust their prices in response to
market shifts. So for example, we did an analysis of Q1 in 2023 where we looked at all the all the Oem's that we work with. We analyzed their parts portfolios and how market prices have changed and we found that for 76% of parts. The market price has changed by more than 10% within one quarter. Wow. So the obviously the and not all of them increase, right. Many decrease, others increase. There's really no rhyme or reason to it.
That's why we always tell our customers, hey, you really have to look into pricing changes on a product level and not just do an overall 2% markup. That's just not going to do the trick in today's digital environment anymore. So the main benefit is really to just be more deliberate and make better decisions. With accurate market data as kind of the baseline that you need to do that and what's surprising or what was surprising to us as well.
We as a company, we helped through a few of the OEMs go through prices where new equipment says we're way down. But of course what was still up and running was service and spare parts, because people are still operating their machines and they have to repair them so. Using market based pricing especially in such a downturn period really helps with hedging against these downturns and minimizing risk because the demand for parts compared to equipments will really increase
during these periods. So also pricing will increase and as a manufacturer you adopt market based pricing and you realize that you will really defend your profitability during times of economic downturn or recession. So that's not a big benefit here, huge benefit. That's a huge one. Yeah. And now one last that I want to highlight actually that I just forgot. It's not only about just maximizing profitability, right. That's one benefit of market
based pricing, yes. But the other one really also is to enhance customer satisfaction and making sure that you as the OEM can be the true one stop shop provider for all parts needs from your customers. Because you can make sure Okay, I've seen that on this part. I have a couple of dozen competitors and they're actually way cheaper than I am in the market. So now I'm making a deliberate decision to lower my price to be competitive.
And then I will go to all my customers and tell them, hey, we invested into market data. We saw that we were too expensive on some of the parts. So we reworked our cost structure, whatever and now we can be much more competitive. So why don't you just consider buying all your parts needs in the future from us? Instead of shopping around and going for different parts to different vendors and that's really the blue Ocean strategy then sure, sure.
Yeah, I mean being the one stop shop so they don't have to go to other competitors and also having more of a market value on their pricing is that's a good, you know it's a good point. It makes sense. When you say like that, you lay it all out, it makes it all seems simple, but how can OEMs implement market based pricing if they already haven't started this process? Well, the most important thing is to collect data at scale, right?
Usually any manufacturer has a couple of thousands or even hundreds of thousands of part numbers or products in general in their portfolios, and gathering accurate market data for a complex portfolio is incredibly difficult so.
But most companies or those that are already thinking about market based pricing are doing is they do manual research where they just put in certain part numbers, for example into Google. And pretty quickly they will see that there's so many vendors out there and competitors using part numbers to sell the same parts that they get overwhelmed and they only do it for, I don't know, their 20 or 50 most important part numbers in their portfolio because otherwise they
just can't handle it anymore. It's. It's pretty funny because that's actually how we started the company. Our founder, he was a pricing analyst for a big OEM in Germany, and he was tasked with gathering market data for parts that they sold. He did it for three months for I think 300 parts that they sold back then. He was burned out after the three months, and he realized that after three months all the market prices have already changed again.
Wow. And it was like okay, there must be a better solution to it. So that's why he came up with that idea of let's just automated build a tool that collects market data at scale, makes the whole process more sustainable. So nowadays luckily OEMs, they do have access to analytical tools that does all the heavy lifting for them. And then the pricing experts within these companies, all they do is they use the data that's been collected for them by some tool and.
Implemented into their broader either value based or cost plus pricing strategy, whatever it is. And the last step then really is to once you make the changes, you have to have a rock solid communication strategy in place because otherwise you will scare off your customers even if you're still technically in line with the market. So I had this example. I was working with Noem in the elevator industry a couple of months ago.
They were underpriced for a significant portion of their business and what they did is raised the prices quite significantly, so by more than 30% in some instances just in one jump. But they had a very, very good communication strategy in place where they explained their customers why they did that. And they also highlighted a few key parts where they dropped the price to be more competitive and they almost had no negative impact on their sales
quantities. Despite these heavy price jumps. So it's all about how you communicate it with your team and with your customers as well. Yeah, that customer satisfaction piece is huge and it goes a long way. Even if you don't have that, if you're missing that but you do have all the right data, that's a huge component you don't wanna forget about cuz that can make or break obviously your sales.
And it's and it's really depends also on what your distribution strategy for parts is. Because when you sell directly to end users, then of course you have that direct relationship, right? And it's easy to push out communication to them. It gets a little bit more tricky when you sell through dealers, right?
So various industries like in agriculture, construction, I know HVAC, there's all these industries out there where pricing teams are very sophisticated, but they don't have a way to communicate with the end users who are actually buying the parts directly. So you also have to involve in this whole market based pricing thing, you also have to include your channel partners and make sure that you are providing them
with the correct list prices. And you also provide your channel partners with the market data so that they precision themselves correctly in the market so that you're not losing market share to all these other OEMs or third party vendors out there, gets a little bit more tricky there. But the more data you have, the better you're prepared for these discussions. Yeah, exactly, exactly.
Now this next question I want to ask, you can apply to either the OEM and manufacturing industry or others. But from a long term perspective, how has market based parts pricing shown its resilience in various economic conditions, essentially contributing to the overall stability of the industry I? Think the main point really is just the resilience when it comes to recession, right.
Because in. In economic downturns, market based pricing can adjust either downward to maintain the sales quantities that you need, for example to not have too much stuff in your inventory and to just get your inventory cleared out. Or at the same time, as I was saying earlier, sometimes the prices for parts in a recession even get higher, so you might keep your profitability high despite being under pressure on the new equipment side and the.
The other really I guess the biggest piece here is, especially when it comes to overall stability of the industry, is the whole reshoring trend that we see that a lot of manufacturing is coming back to the US specifically and we're relying less on on global supply chains nowadays. It actually helps the industry stabilize because all of the sudden you don't have all these offshore competitors anymore for huge chunks of your supply chain.
But then it's more important to keep track of your local competitors because your local competitive landscape and the ecosystem here will thrive and develop. And it's much more important to keep an eye on what the local American market is offering in terms of prices and lead times compared to, yeah, they will just buy it in China because it's cheaper over there. So that's having that access to market data will make our local players here in the US more
competitive. And it's a beautiful coincidence almost that it's it coincides with the with the whole reshoring trend nowadays. The the last thing I want to highlight sorry I keep rambling here a little bit but I get excited that's great. The last thing is really that or any everyone in the industry wants recurring revenues, right and or anyone parts when you sell a piece of equipment whatever it is. Arts and services, that's your steady stream of income. You know that it's going to be
pretty predictable. It's recurring revenue. You don't have to do too much about it to get that sales and that profit in. And however you are, you're risking to lose that market share or that predictable revenue if you're not adjusting adjusted to a more intense competitive environment. So having access to market data will make you more resilient in the long term because you understand how the market is shifting. And you can defend your position as the OEM in the market, sure.
Yeah, that's good. Yeah, the access is a huge deal. I mean if you don't have access to the information you need to be considered a legitimate competitor, you're probably not going to thrive as successfully as you think you might would, as
you think you would. One last question for you, Tim, Can you discuss instances and you may have already alluded to this, but can you discuss instances where market based pricing in the machine manufacturing industry has resulted in better alignment with customer needs? Absolutely. We already talked about
resoring, right. So one side effect of it is actually especially in the last two or three years with all the supply chain crisis things that we had going on suddenly lead times for parts and critical electric components for example, they exploded. So a lot of manufacturers that already invested in market data prior to the crisis. They benefited significantly because they, yes, on the one hand, they had pricing intelligence for the North
American market. But in order to do that, they also had to know who is supplying certain parts, at what price and what are their lead times. So all of the sudden they were much more flexible. They could shift their global supply chains more quickly to a North American supply chain. And source critical components quickly before all their competitors in the market tried to do the same thing, just because they had a broader
transparency of the market. So that really aligned well with customer needs because they desperately needed parts back then. They didn't care about the price to be honest. They just needed it quickly. So those companies that had a good understanding of the competitive landscape, they've sourced it locally and they they weren't big, let's put it that way. Wow. Awesome. Cool. And the one other example is
really when you. When you first launch some new product or component or whatever in a market where you don't know the market price, it's incredibly important to do that analysis before you launch it, as you know, because the best point or the best point in time to introduce a new price is when you launch the product. If you want to increase the price at a later stage, it's always, yeah, so it's a huge discussion with your customers. So you want to avoid that?
Sure, yeah. Yeah. But there has been success in doing that, but there's also been obviously some failures as well as far as dropped profitability and decreased revenue. So it just depends on how you communicate and depends on, in this case, the data you have and the type of market data you have. So Tim, I really appreciate your time speaking with me today. It's been a pleasure.
You were able to give us a lot of insight, a lot of gyms regarding this topic and you are going to be with us in Atlanta in October. He's going to be leading a speaking session called rethinking cost plus the journey to market based pricing. Now before I let you go, Tim, would you mind sharing with the listeners any way that they can learn more about you or market pilot or how they can get in
contact with you? Absolutely best way to get in touch with me is on LinkedIn. I'm very active there. So happy to connect with any pricing experts or soon to be pricing experts out there. Just look up Tim Geyer that's you probably saw the name in your podcast Catcher looking forward to connect and would be happy to chat more over a beer in Atlanta. All right. Thank you so much for your time. So you have a very safe day today. Thank you for having me. Take care.