Discounting the aftermarket
I hate discounts for one reason. I call it price gravity. Give a mouse a cookie, and soon enough he will want a glass of milk. Where do you draw the line? Do you have a hard and fast “criterion” for issuing discounts? Are there commitments that must be honored by BOTH sides to continue offering a discount? Do discounts have expiration dates, or at least re-assessment dates?
As much as I hate them, I understand that discounts are a necessary part of our business model. Equipment sales has always been a highly competitive war zone, but recent years have seen dealership sales departments actually operating at a loss (or at best “near net”). This condition is due to the commoditization of our industry. Ralph Waldo Emerson once rightly concluded that if you build a better mousetrap, the world will beat a path to your door. The evolution of our business over time however has severely narrowed the differentiation between our branded “mouse-traps”. We may have our own versions of gadgets and gizmos, but the basic functionality and production capability of the machinery itself is now in great part limited by physics. We can’t make them turn much tighter, or go much faster without sacrificing safety. As far as engineering goes, we’ve reached critical mass.
So, since we can no longer create a measure of advantage through productivity, we turn to economies of scale. This has naturally moved the OEM’s to seek synergies. The Hyster-Yale, MCFA (Cat-Mitsubishi-Unicarriers), and Toyota-BT-Raymond mergers and/or acquisitions serve to illustrate this trend. Consolidated manufacturing creates the volume necessary to create a profitability advantage. As with many industries however, these new-found profits are short lived, and pricing advantages are being quickly swallowed up by the competitive marketplace. In many quarters we now have a devolving price vortex as customers continue to want more for less, and we scramble to find ways to satiate their demands. The next phase of our industry’s evolution appears to be building back value by leveraging data. Meaningful fleet management will be supported in great part by advances in telematics, motive power, and a more consultative approach to selling. This will provide fresh opportunities to add profit back to sales operations, but it may be a bumpy road. For now, our sales departments soldier on.
By contrast, the aftermarket has always been the store house of profitability that keeps the dealership solvent. It’s not that these departments have escaped coming under fire. When customers can buy their lift truck parts on Amazon.com, it forces the dealership to improve their practices! By and large however, most material handling customers depend on the dealer to keep their equipment running. The advantages we provide through our field service team should create value that keeps the customer in our orbit, and off the internet.
Customers however are not exceptionally brand loyal when it comes to caring for their fleet. Independent (and OEM owned) aftermarket parts suppliers make it possible for our competitors to contend for the service business. Who doesn’t advertise the fact that they can service “all makes and models”? So, in order to capture and retain the service and parts business, aftermarket departments have been more willing to discount their parts and labor prices.
Unlike equipment sales however, discounting the aftermarket can be complicated and fraught with unintended consequences. Selling equipment is simple. We buy it, we mark it up, and we sell it. Selling service is much more complex. Think of what it takes to service a customer.
- Parts inventory (both on the shelf and in the van)
- Competent and well-equipped technicians
- Significant investments in training and certification
- Service vehicles
- GPS systems
- Service writers
Deployment of all these resources must be considered when formulating a discount strategy. There must be quantified standards that must be met in order for customers to qualify for a discount. Not all customers represent the same opportunity. Assessing the revenue and profitability opportunities cannot be based on how “big” the customer is…or even how many units they operate. To maintain an adequate return on the investment you have made (see the list above), it is incumbent on you to investigate the following dynamics.
Parts Profit Potential
Is the customer using your parts? Are they buying OEM parts? Are they buying “everything”? Many large companies are in the practice of purchasing fast moving service parts like filters, oil and grease from an independent source, and then expecting you to install these parts at a discounted labor rate. This means that you will have a service van full of parts that will just sit while your technician installs someone else’s parts. We offered NO discounts to these customers, regardless of their size. When the customer complained, I asked him how many times he brought his own eggs and bacon into a local diner and asked the restaurant to cook them for him. Asking us to provide labor without parts is just as silly.
Logistics matters. The further the customer is from your base of resources, the more expensive it will be to provide services. If, however the customer has enough units to support a “resident mechanic”, that may be worth the trouble. This tech may need to be supported by onsite or consignment inventory, but the value in having the tech in one location for the bulk of the day is valuable. The popular practice of flat rating travel time with “zone charges” or “callout fees” makes having a tech moored to one location more profitable, and can counterbalance the negative effect that distance can cause.
Sometimes we sell equipment that only a select group of highly trained technicians can work on. Deploying your “highest value” assets to a low profit opportunity is not a good business practice. The fact that not everyone can service the equipment eliminates competitive price pressure. Hold your ground. There is no reason to offer discounts in these circumstances.
Does the customer have an adequate workspace for your field service techs to perform service? Are your technicians relegated to a parking lot? Does the customer constrain them to work in inclement weather? These are valid concerns when considering discounts.
Do you have a customer that asks for a discounted rate, then makes you wait to service the units until it’s convenient for them? Customers love a low PM rate, and then they will scream if you charge them for stand by time. Why should these customers get a discount?
If you are considering special rates and discounts for a customer, first consider the OTHER customers you may be currently servicing that are in the same industry. I have observed many times that (as a point of pride or ego), rate information is often shared between competitors in the same industry. This can be a disaster. Customers that are loyal to you at your list rates, will feel mistreated when their competitor across the street gets preferential pricing. It always irritates me to see TV commercials that offer specials for “new customers only”. Don’t assume your customer will feel any different.
Discounts are part of our world…. I get that. There are times and reasons why it may be strategic to use discounts to develop your aftermarket business. My advice however is to actually be strategic and do a fair assessment of the total value of the customer, and the ripple effects of extending discounts. I always tend to think that it’s better to ADD VALUE than it is to cut prices. Find a way to quantify the criterion and minimize the ripple effects, and you will be in a position to better control your overall aftermarket profitability.
Dave Baiocchi is the president of Resonant Dealer Services LLC. He has spent 37 years in the equipment business as a sales manager, aftermarket director and dealer principal. Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance. E-mail email@example.com to contact Dave.