Mechanical engineering is one of the most important export sectors of many economies. Many companies from this sector are very successful on the world markets. However, despite the apparently good situation, many manufacturers are under increasing pressure to increase their growth and profitability. Optimized price management that makes wise use of the various pricing levers is an indispensable prerequisite for tapping existing potential and generating growth.
In recent years, many mechanical engineering companies have successively expanded their business on the world markets and achieved market-leading positions. Nevertheless, it is and remains crucial to be optimally positioned on the pricing side and to improve price management in a targeted manner in order to leverage the growth and profitability potential that has not yet been realized.
If plants are typically priced as part of customer enquiries and tenders in the form of offers, machines often follow a different price logic based on greater price standardization. For price management, this means defining different approaches for the business types “project business” and “standard business” and optimizing corresponding pricing models and processes.
Pricing levers for mechanical engineering companies
The optimized price management takes an overall look at the various levers, both in product pricing and in the customer-specific pricing process.
Lever 1: One of the elementary pricing levers is the optimization of product pricing. Price structures must be built up systematically and logically and customer benefit must be at the centre of the calculation. The customer benefit should be determined in as much detail as possible and realistically reflected in the price. In addition to these benefit-based approaches, it is also advisable to consider the prices of competing products. However, these are often incomplete or not up-to-date. At the same time, it is necessary to comply with competition law and legal restrictions on the collection and use of competitive information. An elementary component of the product pricing strategy is also the definition of the future price positioning of the entire product range. Different product lines can support the differentiation of price levels. Here, too, it makes sense to keep an eye on the reactions of customers and competitors in order to be able to correctly interpret volume adjustments to price changes or repositionings.
Lever 2: Another important element is the optimization of customer prices. Segment-specific or customer-specific prices are achieved on the basis of predefined list prices through the systematic application of discount and bonus regulations as well as payment conditions. Essential for successful implementation is the definition of different, definable customer segments into which all customers are sorted. In practice, there are often ABC classifications for customer classification, but these rarely meet the requirements of target and price-oriented customer segmentation. The definition of payment terms as well as discounts and bonuses are typically subject to sales, which also classifies customers into individual segments. It is essential that the customer classification process is systematically aligned with the customer segments to be processed and that rules and escalation levels are applied to the awarding of conditions. Various projects have shown that there is great potential to be tapped in these areas in particular, which will have a positive effect on volume developments and profitability. The goal of better price implementation can be supported by establishing an accepted sales incentive system. On the controlling side, a comparison of price quality can provide valuable indications of a significant improvement in the margin situation.
Lever 3: Service and after sales already play an important role in many mechanical engineering companies. It is important not only to define the right services and after-sales services, but also to apply the right price logic. Even though service and maintenance contracts are often already being offered, this area regularly provides the opportunity for substantial improvements. The decision as to which services should be offered at all, which should be free of charge for the customer and at what price the others should be positioned in the market can also be made on the basis of customer segmentation. In this way, both the customer offering can be optimized and the revenue quality significantly increased.
Lever 4: The sale of spare parts and consumables is often assigned to the aftersales area. Especially in these product categories, it is necessary for the mechanical engineering company to define to what extent this business area should be independent and profit-oriented or whether it should be granted a pure support function. Due to the frequently high number of articles, it can be assumed that price management will be more complex. Alternative pricing approaches, which may differ significantly from the methods used for pricing new machines, must be defined and optimized. The competitive threat to individual product groups plays a particularly important role in pricing. Purchased, DIN or standard parts generally tolerate much lower margin surcharges than exclusive or monopoly parts produced in-house. The scope of repair sets and modernization kits must also be determined in order to be able to optimally skim off the customers’ willingness to pay, taking all general conditions into account.
Lever 5: For many mechanical engineering companies, an international presence is a matter of course and already a reality today. Nevertheless, international pricing poses a particular challenge. Price differentiation is opposed here by price harmonisation. It must be clarified which type of differentiation and above all which degree of differentiation is most effective in which market, what influence local conditions and competitive situations can have on the price and to what extent currency fluctuations as well as inflation rates and possible grey market flows affect sales. Differentiation levers and drivers must be analysed in detail. It often makes sense to differentiate prices within regional corridors and coordinate them internationally.
Lever 6: The introduction of new business models has proven its worth in generating growth and improving revenue quality. There are a number of models such as pay-per-use, machine leasing, financing models, used machine offers, digital offers or optimization support and the like that can be tested for implementation. Which business model is suitable for which company or product area depends on the respective company structure. Software versus hardware versus service – these are the three pillars that must be shaped in sales in the mechanical engineering sector.
Lever 7: The implementation of the defined price strategy and the implementation of the respective price points are much more successful for sales today if value selling approaches are taken up. Similar to benefit-based price setting procedures, customer benefit and willingness to pay are in the foreground. Through appropriate training, the sales department is enabled to argue prices better and subsequently enforce them better. The argumentation of benefits and the handling of objections are two important elements in the preparation of price discussions or contract negotiations. These can be structured and systematically archived with the help of customer battlecards. Offer tracking and analyses of won and lost orders provide valuable insights into how the concrete negotiation situation can be improved in the future.
Growth and profitability – a good combination for a secure future
The mechanical engineering sector is one of the most important branches of the economy in Germany, which has achieved a great development in recent years. However, many companies neglect the necessary review of their pricing strategy and the associated methods, tools and processes. There are a number of pricing levers that need to be used not only to strengthen growth and profitability, but above all to promote them with a view to the future. Only if the often still widespread volume and turnover thinking is replaced by a stronger revenue orientation, will it be possible to achieve the ambitious goals of mechanical engineering companies.