As industries evolve and customer expectations rise, machine manufacturers need to find ways to differentiate themselves and stay ahead of the curve. With growing demands for efficiency, transparency, sustainability, and innovation, many companies are starting to rethink traditional cost-plus pricing models. Alternative pricing strategies like value-based pricing can boost profitability and help machine manufacturers navigate the complexities of the modern market. In this article, we’ll explore why machine manufacturers should incorporate value-based pricing into their pricing mix and look at how it increases profitability and customer loyalty.
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Value-based pricing is a pricing strategy where prices reflect how customers perceive a product and the value it provides. In addition to the product and its features, other factors such as brand reputation and quality of service can impact how price is determined.
In machine manufacturing, value-based pricing is typically used when a part or product is unique in the market and there is no data available for comparable products or prices. In the absence of competitor data, machine manufacturers can set prices according to the overall economic benefit a machine or part provides to customers, instead of relying solely on material and labor costs incurred during production.
By pairing market-based pricing with value-based pricing, machine manufacturers will be better able to adapt to market fluctuations without sacrificing profitability. Value-based pricing is useful for exclusive products or scenarios where no market data exists for comparison.
On the other hand, if there is competition and relevant market data is available, machine manufacturers should align their prices with industry standards and current market conditions.
One of the primary benefits of value-based pricing is its potential to increase a company’s profitability. By setting prices that reflect the value of the product, machine manufacturers can capture a larger share of the value they create for customers. For example, if a machine reduces a business’s production downtime by 30% or increases operational efficiency by 60%, the manufacturer can choose a price that reflects the significant cost savings and increased revenue that the customer gains from using the machinery.
Even a small increase in price can have a significant impact on profits, with Professor Andreas Hinterhuber, a leading pricing consultant, noting that, “On average, a 5% price increase leads to a 22% improvement in operating profits.”
Value-based pricing doesn’t just benefit machine manufacturers though. This approach to pricing prioritizes value, compelling companies to deeply understand and address the unique pain points, needs, and preferences of their customer base. By focusing on what matters most to customers, machine manufacturers can develop innovative solutions that not only meet but exceed customer expectations. When businesses see that a manufacturer is invested in creating machinery, parts and services that are specifically tailored to their needs, it not only fosters a sense of trust and appreciation, but also makes them more inclined to pay premium prices.
Several machine manufacturers have successfully implemented value-based pricing strategies to drive growth and profitability. Here are just a few examples:
Carbon Robotics
With a price exceeding $1 million, the LaserWeeder from Carbon Robotics provides unparalleled efficiency and sustainability for farmers. Leveraging high-resolution cameras and AI, the LaserWeeder is able to remove weeds with millimeter precision, offering a chemical-free, no-till alternative that preserves soil health while addressing the rising challenge of herbicide-resistant weeds. This innovative machine has a payback period of just two to three years on 200 acres and can weed up to four hours per acre, replacing up to 70 manual laborers. Despite its hefty price tag, orders continue to exceed supply, with waiting lists extending over a year. Given its exclusivity on the market and the unique value it offers, a value-based pricing approach is the ideal strategy for pricing this machine.
John Deere
John Deere has always stood out for the quality of its machinery. Over the last decade, they’ve further differentiated themselves with their commitment to IT innovation. Their Deere Smart Industrial strategy focuses on providing customers with intelligent, connected machines and applications that will have a significant impact on how work is done in agriculture, forestry and construction industries. The prices for the John Deere X9 combine and 9RX series of tractors reflect the value that their innovation offers.
Husky Injection Molding Systems
The injection molding systems from Husky command high prices, but the annual revenue for the company during 2022 and 2023 reached approximately $1.4 billion. The company addresses their premium pricing on their website, highlighting that their systems have always been about return on investment, long-term value and end-to-end solutions for customers. Their differentiation value and customer-first approach is front and center in their marketing communications, reinforcing their image as a global leader in their field, whose machinery is worth the investment.
The rapid adoption of technologies such as IoT, AI, and advanced data analytics is not only useful on the field and in factories. It’s also revolutionizing the way machine manufacturers can implement pricing strategies. Machine manufacturers can now collect detailed data on market prices, making it simpler to identify similar products and their price points.
With our upcoming product evolution MP ONE - The AI Platform for Parts Pricing and Market Intelligence, machine manufacturers will be able to efficiently optimize their pricing strategy for the entire parts portfolio. Detailed data about the pricing landscape provides machine manufacturers with valuable insights, so they can decide when it’s best to use market-based pricing or value-based pricing for individual parts. With the ability to configure minimum and maximum margins as well as price drivers, MP One makes it possible for machine manufacturers to develop pricing strategies that are grounded in data.
With increasing competitive pressure, rising customer expectations, technological advancements, and supply chain challenges, traditional cost-based pricing methods are no longer sufficient. By carefully adopting value-based pricing, machine manufacturers can better align their pricing with customer value, and in turn, increase profitability and improve customer loyalty.
Curious to learn more about how MARKT-PILOT solutions can contribute to optimize the pricing strategy for your parts business? Request your personalized demo with one of our experts and learn how to use the potential of market- and value-based pricing strategies for your company.