Automotive suppliers give themselves only moderate grades for their own pricing

We then asked how one’s own performance or ability to enforce appropriate prices with the customer is rated. Here, no particularly good grades are given, because half of the respondents see their own performance as satisfactory or poor – a worrying result, especially in view of the importance of pricing in this industry.

Price policy goals of automotive suppliers 2017

As part of the study, we also wanted to know which pricing measures were in the foreground in the current year 2017. Half of the companies try to convert value increases through technical changes to their products into additional revenues; almost as many companies have to implement sustainable price reductions due to internal optimizations in the current series. This shows the price and productivity pressure of the OEMs. Only about a quarter of the respondents want to renegotiate existing prices and enforce price differentiations.

Pricing-Research for Automotive Suppliers

The first core element of pricing is pricing research. The question arises as to what the company’s own prices are based on. According to our study, costs (93%), experience from past projects (82%), information from customer discussions (72%) and competitive analyses (62%) are the main factors in the pricing of automotive suppliers. Activities aimed at exploring value drivers are not in the first place.

Pricing Strategies for Automotive Suppliers

In larger companies, in our experience, price strategic objectives can only be achieved if the price strategy is available as a written, adopted document. According to our study, only 60% of the respondents have a documented pricing strategy. This has already been shown by our previous pricing studies: a relatively high proportion of companies have not adopted a price strategy as a binding guideline and put it into effect.

On the other hand, pricing is already relevant for suppliers: 73% of respondents rate the development of a pricing strategy as important or very important. In our estimation, either the impulse and insight to deal strategically with pricing is lacking in practice, or there is a lack of the necessary pragmatic tools.

Do Automotive Suppliers Accept Negative Contribution Margins?

An important price strategic question is whether suppliers accept orders with negative contribution margins. More than half, namely 58% of the respondents, according to our survey, do not accept orders if they do not expect to make a profit. On the other hand, a considerable part is forced to also strive for orders with negative contribution margins.

Price strategically important is the question of whether pricing is based on costs, competition or the value of the product from the customer’s perspective. Our survey clearly shows that customer-oriented, value-oriented pricing has the lowest priority (29%). Cost-oriented pricing (72%) and target pricing (63%) are most commonly used, followed by competition-oriented pricing (58%).

Criteria for Price Differentiation among Suppliers

A core topic of pricing is price differentiation (see Pricing-Newsletter No. 5). The basic assumption is simple: customers have different willingness to pay in different situations, at different times and in different regions. Strategic price differentiation aims to get as close as possible to the theoretically optimal price.

The most important criterion for price differentiation, according to our study, is unsurprisingly volume. Economies of Scale are a typical industry phenomenon that obviously strongly influences pricing. Second is the intensity of competition. Many supplier parts do not have a real unique selling proposition, they are obviously under considerable competitive pressure.

No Lifecycle-Based Pricing for Automotive Suppliers Yet

Surprisingly for us, however, only 40% of automotive suppliers differentiate prices strategically according to customers and customer groups. We suspect that niche suppliers or manufacturers of luxury vehicles have a different willingness to pay, regardless of volume issues. The life cycle of the respective model also plays a surprisingly small role in price differentiation. One could also assume that the price pressure from the OEMs increases towards the end of the life cycle, while at the SOP (start of production) the enforcement of lower prices at the suppliers is less important than perfect delivery performance and error-free quality.

Disclosure of Cost Structures by Suppliers?

A typical element of strategic pricing is the OEM’s attempt to create transparency regarding costs and profits at the suppliers. Here we found different reactions: With 58%, a kind of salami tactic is most widespread: the successive disclosure of information – while strategically relevant information is rather withheld.

Implementation of the Pricing Strategy for Automotive Suppliers

An element in pricing that is often underestimated in our experience is implementation. We see the implementation phase as a separate process within pricing, the careful design and control of which is a prerequisite for pricing strategies to be effective in the market and with customers. From the variety of levers for price enforcement, we have selected some central building blocks in the context of our study.

IT Support for Supplier Pricing?

This includes, among other things, the support of pricing by appropriate IT systems. Only just over half (51%) of the surveyed suppliers have IT-supported evaluation tools for pricing, while 41% do not receive any IT support for pricing. Only 14% can access a Pricing Data Warehouse. The implementation of the price strategy through suitable IT systems thus has some gaps in the industry.

Organization of Pricing for Suppliers

A very important lever for the implementation of price strategies is the organizational anchoring of pricing in the company. Therefore, we wanted to know if there is a separate department for pricing. After all, 57% of the respondents stated that the suppliers have a pricing manager or a pricing department. Compared to other industries, this is a quite considerable value.

In almost a third, the pricing team is directly assigned to the management, in another 15% to the business unit management. Caution is advised when pricing is directly under the sales management. The effectiveness of price enforcement can suffer if the sales department responsible for customer-related pricing controls itself.

Pricing Departments for Suppliers?

Surprising for us was the result that only 43% of the respondents consider an independent pricing department to be sensible. Against the background of the high complexity of pricing for automotive suppliers, due to a high product variety, annual price reduction demands from the OEMs, raw material price fluctuations and the general purchasing power of the OEMs, we did not expect this result. Especially for automotive suppliers, a pricing department could be a way to defend against the price pressure of the OEMs and strengthen their own profitability.

Price Responsibility for Suppliers

The operational price decision-making competence for the individual order lies in 58% of the cases with the sales manager. The marketing-related functions such as product manager (7% of respondents) or pricing manager (6%) have virtually no influence on operational price decisions compared to sales. This was also confirmed by our expert interviews conducted prior to the study. Why can this be problematic? Sales is often driven by sales and volume targets, not by contribution margin or profit targets. Therefore, the motivation is naturally higher to grant price discounts. Business unit managers and product managers, in our experience, keep a closer eye on the strategic goals of pricing.

High perceived profit potential in the pricing of automotive suppliers

An important result on the pricing processes at the end: half of the suppliers surveyed estimate the profit potential of improved pricing processes as high or very high. Automotive suppliers obviously see a need for catch-up here.

Price controlling at automotive suppliers

A final, very important element of the pricing process is price controlling. This closes the circle: Are the premises of the price strategy viable? Are the medium-term price strategic goals achieved? Are implementation successes measurable in detail?

Elements of price controlling at automotive suppliers

Above all, the contribution margin at product level is the subject of price controlling for significantly more than half (61%) of the respondents. Other important elements are, in our estimation, clearly too short. The fact that more than half of the respondents do not control the price of technical changes is particularly surprising. In our estimation, it would be important to analyse whether such changes have actually led to price increases. Against the background of the annual price reduction demands of the OEMs, which can vary depending on the product, OEM and competitive situation, this result is particularly surprising. The fact that price controlling still leads a shadowy existence at many automotive suppliers was also shown by the discussions with experts in the automotive industry conducted prior to the study.

Untapped potentials in the pricing of automotive suppliers

Where, from the point of view of the respondents, are the greatest untapped potentials in the pricing of suppliers? Price adjustments due to changed volumes (46% of respondents) and additional profit potentials on the basis of self-initiated technical changes (43%) are seen by the respondents as the greatest untapped potentials. Since these two factors are important levers for improving the margin, this result appears plausible, but also shows that automotive suppliers are still very volume-driven. The value orientation and value argumentation of sales is only an important approach for 35% to enforce higher prices.

The conclusion: Pricing at automotive suppliers

The study results have overall shown that the pricing processes at automotive suppliers have optimization potential. The process-oriented analysis framework for our survey shows which levers of the pricing process should be turned to realize a more consistent logic and integrated pricing processes.

Automotive suppliers do not yet sufficiently exploit the potentials of price differentiation

Above all, customer-related, value-driven pricing is not yet at the top of the suppliers’ agenda. This is also underlined by the fact that price differentiation strategies today are primarily based on volumes, while other important options for price differentiation (such as customer groups or technological maturity levels) still have a subordinate importance. Only 60% of suppliers have formulated a price strategy, and only 29% of respondents rely on value-oriented pricing. The price strategic orientation of some suppliers may be worth reviewing.

IT support for the pricing of automotive suppliers can be expanded

Even when looking at operational pricing and the implementation of the price strategy, it becomes clear that there is potential for improvement among the suppliers surveyed. For 41% of respondents, pricing is not supported by IT-based evaluation tools. In addition, the relevance of a pricing department or a pricing manager has not really been established yet.

Automotive suppliers should improve the controlling of price discounts

There is also a need for catch-up among the suppliers surveyed in price controlling. The contribution margin at product level is only available in 61% of companies, and information about price adjustments due to changed volumes or technical changes, annual price adjustments or price discounts is taken into account in price controlling by less than half of the respondents. The majority of the companies surveyed do not control price discounts. In summary, it can be said that the suppliers surveyed attribute an important role to pricing, but have not yet fully implemented it. In view of the pressure to achieve results in this economic sector, important fields of action are opening up here.