EUROMA 2016 conferance paper: The objective of this paper is to identify and describe the maintenance service pricing models used by firms servicing industrial equipment. Today, price pressure in this market has been seen to be increasing with changes in customer buying behaviors. This pricing pressure confirms the need to focus on customer value when pricing (Anderson et al., 2006). Value pricing has been seen to be selectively successful in the B2B environment. Through analysis of different buying behaviors in different industrial segments this paper highlights difficulties and provides guidance on how to overcome them.

1. Service
pricing
strategies
in
maintenance
services
23rd
EurOMA Conference,
Trondheim,
Norway
20
June
2016
Dr Shaun
West,
Dr Philipp
Schmitt,
Dominik
Kujawski

2. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
History
Pricing
and
value
are
not
new
problems!

3. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Introduction
The
problem
and
the
purpose
of
this
paper
To
highlight
difficulties
and
provide
guidance
and
understand
how
pricing
influence
customer
value
This
pricing
pressure
in
the
market
confirms
the
need
to
focus
on
customer
value
when
pricing
due
to
changing
buying
behaviors
To
identify
and
describe
complexity
of
maintenance
pricing
models
Purpose
of
this
paper
Price
pressure
has
been
increasing
due
to
changes
in
buying
behaviors
Problem

4. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Introduction
Why
is
pricing
important?
What
is
important
when
pricing
services?
-­‐ Offering
higher
value
added
products
and
services
-­‐ Offering
services
and
solutions
-­‐ Rethinking
pricing
strategies
-­‐ Setting
the
right
price
-­‐ Capturing
customer
value
Pricing
is
a
key
part
of
the
business
model
and
impacts
many
different
areas
“manufacturers
should
price
their
most
advanced
service
offerings
according
to
value-­‐,
rather
than
to
cost-­‐ or
competition
based
strategies”
(Rapaccini 2015)

5. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Background
Pricing
is
the
most
powerful
tool
in
the
marketing
toolbox
What
does
the
literature
tell
us?
-­‐ Pricing
has
a
huge
impact
on
the
financial
results
-­‐ Pricing
is
a
multi-­‐department
activity
-­‐ Services
are
often
given
away
free
-­‐ Services
firms
need
to
adjust
their
revenue
models
-­‐ Manufacturers
find
it
hard
to
change
pricing
models
It
is
importing
to
develop
pricing
objectives,
strategies
and
tools
to
help
support
new
pricing
models

6. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Background
Value
as
a
fundamental
of
service
pricing
What
does
the
literature
tell
us?
-­‐ That
buyer’s
choice
is
dependent
on
price
is
an
oversimplification
of
the
problem
-­‐ Pricing
has
an
impact
on
customer
satisfaction
-­‐ Pricing
for
services
is
dependent
on
situations
-­‐ Pricing
must
reflect
functional
and
emotional
aspects
-­‐ Pricing
and
service
scopes
are
related
The
use
of
value
must
be
a
central
aspect
in
the
pricing
objectives
“What
is
the
difference
in
worth
of
the
two
offerings
to
my
firm,
and
how
does
it
compare
to
the
difference
in
their
prices?”
(Anderson
et
al,
2009)

7. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Background
Pricing
objectives
are
the
basis
for
profitable
decisions
What
does
the
literature
tell
us?
-­‐ Pricing
objectives
are
quantitative
and
qualitative
-­‐ Sales,
profits,
market
share…
-­‐ Relationships,
competitors…
-­‐ The
objectives
must
be
understood
within
the
firm
The
objectives
of
pricing
lead
to
different
operational
pricing
strategies
within
the
organization
”…objectives
of
pricing
are
to
determine
which
pricing
strategy
will
be
the
basis
for
profitable
decisions
as
a
result
of
company’s
overall
strategy”
(Hinterhuber,
2003)

8. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Background
Pricing
strategies
are
influenced
by
internal
and
external
factors
Cost
plus
-­‐ Easy
to
use
-­‐ Supplier
does
not
understand
customer
value
-­‐ Can
provide
the
customer
with
poor
value
Competition/market
base
-­‐ Pricing
is
controlled
by
the
market
-­‐ Supplier
does
not
understand
customer
value
-­‐ Value
capture
can
be
low
Value
based
-­‐ Customer
value
is
the
driver
for
the
price
-­‐ Supplier
understand
customer
value
creation
-­‐ Supplier
measures
margin
at
the
end
of
the
provide
Pricing
tools
are
needed
to
support
the
pricing
strategies
Scope Cost Margin Price Value
Cost
plus
Competition/market
base
Scope Cost Market Price Value
Value
based
Value Price Scope Cost Margin
Supplier
Customer
Market

9. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Background
Pricing
tools
and
methods
What
does
the
literature
tell
us?
-­‐ Three
categories
for
service
pricing
methods:
cost
based,
competition
based,
and
demand
based
-­‐ Pricing
methods:
negotiated
pricing,
pure
bundling,
trade
discounts,
efficiency
pricing,
cash
discounts,
and
bundling
-­‐ Different
pricing
tools
required
to
support
the
pricing
methods
Correct
pricing
levels
help
firms
to
boost
there
sales
and
margins
”…empirical
research
on
pricing
methods
is
extremely
limited”
(Avlonitis and
Indounas
2005)

10. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Methodology
A
two
step
methodology
was
applied
in
this
study
Interviews
• 6
senior
managers
• End-­‐to-­‐end
sales
process
• Personal
contact
• Different
industries
Cross
case
analysis
• Direct
comparison
• Different
revenue
models
• Different
service
offers
• Compared
with
B2C
base

11. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
Overview
of
the
companies
Companies
described
according
to:
description,
market,
category,
size
and
selling
channels
OEM/SME
– Firm
1
• Hardware/software
• Industrial
refrigeration
• Equipment
indirect/Service
direct
Aftermarket/Large
–Firm
2
• Full
service
provider
for
propulsion
systems
• Marine
• Service
direct/Agents
OEM/Large
– Firm
3
• Power
generation
equipment
and
services
• Power
Generation
• Equipment
indirect/Service
direct
Aftermarket/SME
–Firm
4
• Service
provider
for
rotating
equipment
• Maintenance
services
• Service
direct/Agents
OEM/Large
– Firm
5
• Equipment
and
services
for
textile
systems
• Textiles
• Equipment
direct/Service
direct/Agents
OEM/Large
– Firm
6
• Turbomachinery
equipment
and
services
• O&G,
industrial
Power
• Equipment
direct/Service
direct

12. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
Pricing
objectives
-­‐ top
4
confirm
missing
customer
orientation
Key
findings
-­‐ Supplier
focused
-­‐ Financially
based:
margin
optimization,
stability,
sales,
overhead
recovery
-­‐ Strong
affinity
to
the
cost
plus
basis
of
pricing
-­‐ None
mention
that
optimal
pricing
is
a
key
part
of
maintaining
customer
relationship
-­‐ Firm
3
had
the
best
defined
pricing
objectives
The
basis
of
pricing
objectives
were
inward
looking
rather
than
customer
Competition-­‐related
pricing
Service
quality-­‐related
pricing
Stability
in
the
market
Financial
objectives
(in general)

13. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
Pricing
strategies
-­‐ top
4
showing
cost
plus
basis
to
support
pricing
objectives
Key
findings
-­‐ Popular
strategies
-­‐ Market-­‐based/competition
based
-­‐ Cost
plus
pricing
plus
with
performance
measures
-­‐ Firms
had
limited
consideration
of
customer
value
-­‐ Price
was
used
to
measure
customer
value
-­‐ Firm
3
had
the
most
comprehensive
pricing
strategy
-­‐ Too
few
firms
focused
on
customer
value
There
were
gaps
in
the
pricing
strategies
in
most
of
the
firms
interviewed
Market
based
Cost
plus
Customer
value
Willingness
to
pay

14. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
Pricing
tools
-­‐ top
4
showing
attempts
to
identify
customer
value
Key
findings
-­‐ All
firms
applied
market
benchmarking,
cost
build
up,
and
bundling
-­‐ Benchmarking
was
a
direct
comparison
with
the
competition
-­‐ Trade
discounts
often
provide
a
'feel
good',
although
do
not
directly
reflect
customer
value
creation
-­‐ Bundling
extend
the
model
to
do-­‐it-­‐for-­‐me,
do-­‐it-­‐
with-­‐me
and
the
extreme
do-­‐it-­‐yourself
-­‐ Limited
customer
segmentation
does
not
help
price
optimization
There
were
gaps
in
the
pricing
strategies
in
most
of
the
firms
interviewed
Cost
build
up
Trade
discounts
Customer
value
Willingness
to
pay

15. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
of
the
study
Pricing
tools
and
methods
– basic
tools
and
their
use
Key
findings
-­‐ Cost
based
-­‐ Cost
build-­‐up
supports
financial
objectives
-­‐ Discounts
general
are
reflected
in
margins
-­‐ Price
lists
are
often
cost
plus
based
-­‐ Market
based
-­‐ Benchmarking
supports
consistency
in
the
market
-­‐ Historic
data
support
consistency
in
prices
-­‐ Value
based
-­‐ Negotiations
help
to
identify
customer
value
-­‐ Sales
managers
are
poorly
used
Basic
tools
are
generally
supporting
the
financial
pricing
objectives
Tool Method Popularity
Market
benchmarking
Market H
Cost
build
up Cost H
Negotiated
pricing Value H
Discounts Cost H
Historic Market H
Price
lists Cost/Market M
Sales
manager Market/Value L

16. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
of
the
study
Pricing
tools
and
methods
– advanced
tools
and
their
use
Key
findings
-­‐ Cost
based
-­‐ Cost
models
are
the
basis
of
margin
forecasts
-­‐ Market
based
-­‐ Demand/capacity
pricing
creases
market
singles
-­‐ Value
based
-­‐ Bundling
supports
customer
value
discovery
-­‐ Willingness
to
pay
indicates
customer
value
-­‐ Capacity
pricing
supports
internal
value
-­‐ Revenue
models
support
customer
value
-­‐ Performance
modelling/payback
and
value
in
use
all
measures
customer
value
Not
all
of
the
firms
have
the
tools
to
support
value-­‐based
pricing
Tool Method Popularity
Bundling Value H
Willingness
to
pay Value H
Cost/revenue
models Cost/value M
Demand/capacity
based
pricing
Market/Value M
Performance
modelling Value L
Value
in
use Value L
Payback/ROI
Value L

17. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Results
and
analysis
of
the
study
The
key
observations
from
the
analysis
were
Findings
confirmed
that
pricing
of
services
is
complex:
-­‐ Different
pricing
models
help
with
margin
optimization
-­‐ It
was
hard
to
move
away
from
a
cost-­‐plus
model
-­‐ Firms
had
a
desire
to
move
to
value-­‐based
pricing
but
were
unsure
of
the
implications
-­‐ The
buyer
might
be
more
advanced
in
pricing
model
innovation
than
the
seller
-­‐ Pricing
also
provides
a
focus
on
measuring
customer
value
Within
a
firm
there
should
be
an
alignment
between
the
pricing
objectives,
pricing
strategies
and
tools.
“Such
tools
are
needed
to
create
a
value
based
pricing
model.”
Anderson
et
al.
(2009).
Firms are not
using information that could help them to identify the customer value

18. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Closing
Conclusions
There
is
a
need
to
focus
on
customer
value
creation
during
pricing
by
aligning
pricing
tools,
strategies
to
support
firms
pricing
objectives
Pricing
services
is
challenging
due
to
a
large
number
of
dimensions
Pricing
was
treated
more
as
a
cost-­‐plus calculation
Many
firms
had
unclear
pricing
stratergies
Pricing
objectives
and
tools
in
line
with
pricing
strategy
is
critical

19. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Closing
Recommendations
Determining
the
right
steps
to
improve
co-­‐creation
of
value
with
the
customer
could
allow
improving
pricing
strategies
Research
into
pricing
dimensions
impacts
on
pricing
objectives
Additional
insights
and
surveys
to
understand
different
segments
Identification
of
the
most
effective
pricing
tools
Best
practice
roadmap
to
improve
value-­‐based
pricing

20. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Draft
Initial
prototype:
value-­‐based
pricing
using
many
inputs
to
identify
the
’fair-­‐price’
Triangulation
of
value-­‐base
pricing
based
on
the
data
and
analysis:
market,
internal
and
customer
cost
build-­‐up
Total
value
delivered
Benchmark
price
ßPains
value-­‐based
price
Value
share?
Willingness
to
pay
region
Cost
build-­‐up
Gains
à
Margin
Price
paid
(features
)
Tangibles
Intangibles
Goods/
services
Gain
makers
Pain
relievers
Margin
Top
line
Sustaina-­‐
bility
Bottom
line
CustomerMarket Internal Value Internal
Thought:
working
to
reduce
pains
could
lead
to
increased
price

21. 23rd
EurOMA Conference
|
June
2016
|West,
Kujawski &
Schmitt
Thanks
for
your
time!