Market-Based Pricing

By Bennett Whitnell

The third portion of our Parts PROFIT deep dive is the most popular with our clients. It is the topic that most often causes our phone to ring with dealers concerned that their parts performance isn’t what they think it should be. The call usually sounds something like this, “XYZ player in my market is eating our lunch on price and we can’t compete. I need your help to get better pricing from my OE because they are charging me too much for me to make any money.” We have discussed a few times in previous entries that the root cause for issues in the parts department usually lies much deeper than pricing, but every once in a while, we do encounter a dealer where pricing is a major contributing factor to performance. On those occasions, we start asking questions around an area we call market-based pricing.

What is market-based pricing? In a nutshell, market-based pricing is understanding where your dealership is positioned competitively in the marketplace and how faithfully your employees are executing against that strategy. 

KEA Measure 1: Strategic Product Segmentation

You must consider pricing strategy from the truck’s point of view. The first question you must ask when developing pricing strategy is “Will availability/non-availability of the part put my truck out of commission?” From the parts person perspective: “Is the part available upon demand?” If the answer is yes (if it’s an available part), the next question the customer will consider is “Is this part easily available today from other sources?” For the parts department, this translates into “Is it price-sensitive?” If the answer is no, we can control margin on this part. If the answer is yes, we must understand pricing in the market and price accordingly.

If the answer is no (the part is not available upon demand and the truck will be out of commission), then we must consider the same question about price sensitivity. If the part is proprietary to only our brand, what is the likelihood of the part being shopped? The more likely it is to be shopped, the more attention we have to pay to the price. If the part IS price sensitive, then we must understand market pricing for this part.

KEA Measure 2: Strategic Customer Segmentation

It’s tough to maintain the integrity of your pricing strategy if you don’t have one. The competitive landscape of the parts market has changed significantly over the last 10-20 years and your position as the sole source at the end of a cumbersome buying process is a thing of the past. If your parts team has not done the work to understand what your customers need and how your dealership is positioned to meet those needs, you are giving them an opportunity to make the assessment on their own. Our experience is you may not like the answer they come to.

KEA Measure 3: Price Override and Exception Reporting

Assuming you have a defined parts pricing strategy, it’s important your business understands how that strategy is performing in the real world. Two important reports you need to be able to pull from your business system are price overrides and exception reports. These won’t look the same for every system, but the heart of the exercise is to understand where your pricing strategy is not being adhered to or needs to be modified.

KEA Measure 4: Lost Sale Reporting

Your parts counter employees are one of your most valuable tools to understand how the market is reacting to your pricing actions. They are interacting face to face with your customers and getting direct feedback in real time. If they aren’t cataloguing that feedback and pushing it up the chain of command you are missing valuable feedback and the opportunity to adjust.

Inventory integrity, demand integrity and market based pricing are big topics. Wrapping your head around all of it can be overwhelming if your dealership is not already executing against them. If you’d like more information and to participate in a broader discussion on the parts business, join our parts webinar this Friday to learn more!

Join Keith Ely for a webinar on Absorption Habits in the

Parts Department this Friday

February 28 at 12:00pm Central.

Click here to register!