Cross-Border pricing in B2B markets

Expert point of view : 

Neil Fryer’s professional experience spans over 20 years in the automotive replacement parts business, working for multinational companies such as TRW and Fiat Group Automobiles. Early on he learned the importance of optimal replacement parts pricing in delivering bottom line results and discovered that many companies have insufficient focus on this critical business process. He is convinced that concentration on pricing could help to eliminate risks and bring big benefits in a rapidly changing business environment with new competitors emerging. Neil will be discussing the impact of the online channel on parts pricing at the EPP Aftermarket Forum this year.

Cross-Border pricing in B2B markets

Automotive component manufacturers usually sell on a B2B basis in the aftermarket, utilising a network of distributors to get their products to the garages that serve the end consumer. Consequently, product price setting has to take into the account the margin requirements of different actors in the company’s distribution network.

Historically component manufacturers operated in Europe with semi-autonomous subsidiaries or importers in every national market. Each of these set prices for the company’s products on the basis of local market conditions, often leading to significant differences between countries for the retail price of the same article. Combined with market specific discount structures this meant that a first line customer in one country might be paying much less for a specific item than a counterpart in a neighbouring country.

This didn’t matter much when Europe had borders between national markets and few customers were aware of price differentials. But in the last 20 years the business environment has changed radically. Barriers to cross-border trade fell with the creation of the European single market in 1992 and the introduction of the Euro ten years later made it straightforward for customers to compare prices for the same item in different countries.

Many companies face margin risks where they sell a particular product to their first line customers at different prices in different countries, although there may also be an upside. This can only be assessed once existing price positioning across markets has been analysed.

As a first step it’s important to answer three questions:

1. How big are national price differences in reality?

Comparing a company’s prices in neighbouring markets shows how much risk there is if prices fall to the lowest common denominator. It also shows whether price positioning is consistent, which cannot be taken for granted as a company’s relative competitive strength in different markets may have influenced local price setting in the past. For example, many companies have higher prices in their home market than in countries where they are positioned as challengers.

2. What are competitors doing?

Analysing the competition’s recommended retail prices will show how far they have harmonised pricing between different national markets, if at all. It will also show whether their positioning is consistent across Europe. Competitor action or inaction may prompt customers to pressurise all suppliers for price harmonisation: understanding the situation helps take control of the process and may show companies they can take the lead where there are benefits for their own business.

3. Are customers rational buyers?

Pride, rivalry and suspicion mean that most customers are unlikely to open up to each other and compare their purchase prices directly. But consolidation in a supplier’s customer base is a threat. A first line customer with operations in more than one country can readily identify national differences in purchasing costs for the same product. A rational buyer would seek to purchase products for all markets at the lowest price found in any one market, with an immediate impact on suppliers, and companies seeking post-merger or acquisition savings are likely to act rationally.

Different times, different measures

If answering these questions shows that there is risk then suppliers have to decide how to manage it. While decentralised organisations and pricing responsibilities were appropriate in the aftermarket of 20 years ago, they may not be appropriate in today’s more integrated circumstances. If customers have consolidated through cross-border merger and acquisition, or combined their purchasing power through international buying group co-operations, they need to be managed centrally, even when they retain separate national operations.

The question as to whether a company’s existing pricing organisation, processes and systems can meet the needs of the changed market is critical. Product pricing is central to delivering gross margin and profitability and the approach to a more integrated market may range from “light touch” international coordination with specific product pricing responsibility retained in each country, to complete centralisation with no local decision making responsibility. In the end each company has to decide what fits best with its business model, culture and available resources as it seeks to optimise pricing across Europe.

The EPP Aftermarket Forum

Join us at the EPP Aftermarket Forum on 19+20 June in Frankfurt, organised in partnership with PROS, and with the support of Simon-Kucher & Partners, to discuss the questions that arise from the survey results and look at ways for service parts companies to take their pricing strategy to the next level.  Share your experiences and learn from each other - that's what our pricing and profit optimisation excellence forums are all about !

The Strategic Spare Parts Pricing Masterclass

Although spare parts traditionally represent only 10% of a company’s revenue, it generates more than 50% of its profit. Add to it the fact that your performance on spares and services significantly impacts customer satisfaction and brand loyalty, then you have all the arguments you need to join us on 18 June 2013 in Frankfurt for the Strategic Spare Parts Pricing Master class presented by Marc Toussaint, European Sales Director at Accenture Product Life Cycle Optimisation.

Early bird special of € 1.100 for 2 full forum days, and €999 for the Masterclass ends on 18 April -- click here to register !