Auto Service World
News   April 24, 2024   by Kumar Saha

From the Magazine: Automotive parts price trends

Inflation may be waning, but evolving pricing strategies will keep competitors on edge

Last year, I wrote about the impact of inflation on auto part sellers and workshops. At that time, technicians and shops were finding it difficult to source parts at reasonable costs, citing it as their top pain point in a research study conducted by U.S.-based firm IMR Inc. Repair professionals were also uncertain about the future and did not see price hikes going away any time soon.

Latest Eucon data from the U.S. market shows the tide may be turning for parts pricing. After a staggering 20-point increase in aftermarket prices (on a base index of 100, calculated from millions of data points tracked by Eucon) between 2019 and 2022, price hikes appeared to be easing off by the end of 2023. Price changes remained flat in the second half of last year — way lower than the historically expected one-half to 1 per cent price quarter-over-quarter growth. On the flip side, OE dealer prices were still climbing — moving up by nine points in 2023 alone.

Eucon expects aftermarket prices to remain flat — or even decline slightly — this year. OE prices will continue to see marginal increases in 2024, before evening out in the latter half of the year.

Many will sigh a breath of relief at this news, taking it as a sign that inflation is waning in the industry, the same way it is stabilizing across both the U.S. and Canadian economies.

But the flat numbers only paint half the picture of the pricing landscape. The devil is in the details.

As I have mentioned in earlier columns, the evolving retail landscape — along with the post-COVID experience — has completely changed how OEMs, retailers and suppliers price their parts. As unit growth begins to stall thanks to improving part quality and electric vehicle penetration, pricing has become a key lever in how industry players grow revenue and profit.

But customers will not tolerate constant price hikes. Companies have to balance their margin requirements with the market’s willingness to pay.  As a result, they are adopting new pricing strategies. These novel approaches will keep competitors on edge, despite the relative stability in overall price changes.

So, what are some of these new strategies? Let’s explore.

“But rest assured, prices are moving up and down deep within each portfolio, allowing market actors to optimize and grow their revenue.”

Increasing the frequency of price change

The most obvious change I see in the industry. The aftermarket — at all levels of distribution — has been traditionally slow in making price adjustments, beyond the typical promotions and sales offered by retailers.

At the top of chain (OEMs and suppliers), adjustments were — and, in many instances, still are — done once a year. Now, many competitors are moving to quarterly or monthly pricing action to make sure they are responding adequately to changing market conditions. Fast price actions also allow them to quickly roll back any downward or upward price changes that may impact sales and revenue.

The result? Infinite optimization. No profit opportunity or market share risk is missed.

Price actions deeper in the portfolio

Traditionally, aftersales pricing has been driven by A-parts — the big sellers.

Companies would monitor the top half of their portfolio and make any necessary changes. They would either leave the bottom half alone or simply extrapolate the changes downstream from A-parts, with some nuance added for category or market positioning.

But now pricing managers are digging into their B- and C-parts and making more targeted strategies for these products. For instance, B-parts (the mid-level sellers) can often be captive for OEMs, which means customers may be willing to pay higher prices for them as alternatives may not be readily available.

For aftermarket suppliers, these parts may not get much attention from rivals or customers. As a result, even small pricing changes could have a significant impact on volumes. While these revenue increments may be smaller than that generated by top-tier parts, they allow companies to get closer to their financial goals when minimizing changes to high-impact, volume sellers in a relatively flat market.

Adoption of value-based pricing strategy

For the longest time, aftersales pricing managers simply used a cost-plus approach — prices based on landed cost and internal margin targets. In recent times, stakeholders adopted a combination of cost-plus and market-based strategy, which married profit targets with competitive positioning considerations.

Many companies are now implementing value-based actions. This strategy considers multiple factors: Customer willingness to pay, price elasticity (the relationship between demand and cost), seasonal patterns, product type, channel to market and many others to create an ever-evolving price.

Increasing use of automation

Value-based pricing — along with the added speed and depth — is hard to do with spreadsheets. As a result, many aftermarket stakeholders are rapidly adopting pricing software that allows them to automate pricing with pre-set rules and logic.

Algorithmic approaches allow competitors to make constant micro changes across their products These small actions, when aggregated across many companies, may make the market appear sluggish or flat.

But rest assured, prices are moving up and down deep within each portfolio, allowing market actors to optimize and grow their revenue.

Kumar Saha is Vice President (U.S.)/managing director (Canada) of global automotive data firm Eucon. He has been advising the North American automotive industry for over a decade and is a frequent conference speaker and media commentator. He is based out of Toronto.

This piece originally appeared in the March/April issue of Jobber News

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