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Service Pricing: Why Manufacturers and Distributors Use It

May 27th, 2024 | 8 min. read

By Radha Patel

In manufacturing and distribution, traditional business models have focused on the basics: making great products and getting them where they need to go. However, to play ball on an increasingly competitive global playing field, offering these products and services alone has proven insufficient in maintaining healthy profit margins. Integrating services into product offerings has been one strategy to fill that gap. What, then, is service pricing, and what forms does it take in industrial industries like manufacturing and distribution?

At Pricefx, with manufacturing and distribution among the core industries we serve, we’ve observed firsthand how enhancing product offerings to stand out from competitors and win over long-term customer loyalty is crucial for staying ahead in these industries. And today, incorporating services into business models has become an intrinsic part of that equation.

In this article, we’ll explore the shift to service-based models in manufacturing and distribution, how each industry uses services to enhance profitability, and best-practice approaches to service pricing that facilitate optimal outcomes.

 

Why Manufacturers and Distributors Are Turning to Service-Minded Business Models

Today, the modern customer relationship isn’t simply transactional, where the client buys the product and goes on their way. To keep pace with the evolving needs of modern manufacturing and distribution customers, companies are expanding their strategies to profit across the entire product lifecycle, and this is where services come in. To stay competitive and differentiate their offerings from those of competitors, manufacturers and distributors have shifted focus to providing additional services to their customers that enhance the inherent utility of their traditional products or services.

Among the strategies to accomplish this has been a move to servitization, a business model premised on the idea that services are valuable products on their own and can therefore be monetized based on the benefits they represent for customers.

 

What Service Pricing Looks Like in Manufacturing and Distribution Industries

Services in the Manufacturing Industry

Manufacturers transitioning to service-minded business models have gone from selling no-frills products toward offering products integrated with long-term services, repair, or maintenance solutions.

Technological advancements brought about the Internet of Things (loT) has catalyzed this transition by enabling manufacturing companies to offer a wider range of services while maintaining higher quality standards. One of loT’s notable contributions has been predictive maintenance, AI-driven technology that supplies manufacturers with real-time data on when machinery is likely to fail, prompting a service provider to intervene and mitigate potential parts failures with little downtime.

Equipment-as-a-Service, while not a new movement, is another popular strategy among manufacturers to maintain profitability and cost-effectiveness in their move to service-minded business models. Companies such as Rolls Royce have introduced “power-by-hour” models, where customers can rent out equipment and pay for actual usage rather than investing in the product itself.

Other value-added services that have started to appear in contracts include dedicated support teams to repair and maintain faulty parts and guarantees on performance levels of heavy machinery. For example, automotive companies traditionally focused on selling vehicles now offer vehicle ownership experiences to their customers, such as roadside assistance and extended warranty options, to provide them with heightened comfort and security throughout the vehicle lifecycle.

By offering reliability, support, and peace of mind through the provision of these value-added services, manufacturers ensure that customers come back for more than the products themselves, but for trusted partnerships built on consistent performance and exceptional service.

Services in the Distribution Industry

Historically, distributors have struggled to differentiate themselves on the market, with distribution and warehousing offerings generally lacking the distinctive features that would protect them from easy replacement by competitors. Many of the strategies used in the past for capturing and scaling alternative revenue streams (e.g., acquiring smaller distributors) have become harder to come by in recent years, prompting distributors to get creative in their offerings to fill these gaps sustainably.

One response has been the expansion of after-sales services, which can provide long-term value to customers far beyond shipping and storing of goods. In addition to offering standard distribution services, many of the world’s largest distributors have begun adding value-added services to their portfolios, such as expedited or free shipping, extensive return policies and warranties, and round-the-clock customer service.

For example, logistics giant Maersk offers an impressive range of additional services to complement traditional offerings and deepen its relationships with clients, including:

  • Customized cargo sorting
  • Customized packaging
  • Flexible SKU building and bundling
  • Reverse logistics management
  • Advanced barcode scanner technology

Offering a wide range of services beyond the immediate delivery of goods, as we’ve seen with Maersk, provides customers with the peace of mind that their products are handled with quality care and increased visibility. In today’s competitive distribution environment, that insurance sets apart run-of-the-mill distributors from the ones customers can trust in the long term.

Value Added Services (VAS) is one of the strategies used in the industry to tackle the challenge of pricing complimentary services profitably, and is part of the more general strategy of  value-based pricing.

Beyond creating more opportunities to profit, the strategy plays a crucial role in nurturing and strengthening customer relationships over time. Distributors can win the long-term loyalty of their customers by providing them with the flexibility to tailor their orders to their unique needs, increasing the likelihood that they return to buy in the future.

Service Pricing in Manufacturing and Distribution: What to Consider to Get It Right

Historical Approaches to Service Pricing and Their Limitations

The two approaches to service pricing have historically been to either include services in the product price, inflating that price, or present and price services separately.

Until now, most businesses have followed the all-inclusive approach to service pricing, where service extras are included in the product price. This bundled approach has benefits and trade-offs, with across-the-board inflated prices on the one hand, and varied customer reception, and in turn, missed opportunities to profit, on the other.

Incorporating services into product pricing can enhance the perceived value of products and enable premium pricing, offering a profitability silver bullet for companies with offerings that are otherwise perceived as generic by the market.

 

However, the practice also offers little transparency to customers into the true costs of the services themselves, which can be frustrating; many consumers looking for basic services may not take well to the higher prices that service and product bundling require. The approach also misses out on revenue opportunities from customers looking for a premium buying experience beyond what the offered bundle includes.

Many companies have experimented with a direct monetization approach (i.e., pricing and selling special services separately) to provide more options to customers with diverse service needs and willingness to pay. However, relying exclusively on this approach also has its drawbacks, such as compromising the added value – and increased margins – that these services bring to basic offerings.

In the next section, we’ll explore how to approach service pricing strategically to deliver more value to customers while also maintaining healthy margins.

 

How to Approach Service Pricing Profitably

While most businesses have preferred an all-inclusive approach to service pricing, and some have gravitated to a separate treatment, the ideal approach to service pricing today is to remain flexible.

The decision to include services in the product price, treat them separately, or implement a combination of both, should ultimately depend on each customer. While less straightforward to manage than an either-or strategy, treating service pricing on a customer-by-customer basis ensures the right balance between profitability, customer needs, and willingness to pay.

Above all, executing a successful service pricing strategy requires an accurate assessment of the overheads involved in offering value-added services and the value these services represent for customers.

To understand the value of the services they intend to offer, companies can start by analyzing historical transactional data to tap into the kinds of services customers have appreciated in the past, as well as conduct market research and competitive analysis to determine how these services are positioned and valued in the market.

Understanding the business costs involved in service provisions can prove to be less straightforward than those of physical products due to their intangibility. A cost-plus approach built on direct and indirect costs is a good starting point. Automated costing tools integrated with analytics capabilities allow businesses to monitor the cost of specialized labor and materials, customer support infrastructure, investments in advanced technologies like R&D and training initiatives, and other factors involved in special services delivery and upkeep.

 

Unlock Service Pricing Success With Value-Based Pricing

In this article, we’ve explored the crucial role services play in enabling industrial industries like manufacturing and distribution to rise above uniformity in a competitive global market and sustain long-term partnerships and profitability.

While by no means a simple feat, the key to getting service pricing right is accurately tapping into the true value that services bring to your customers. Value-based pricing is one pricing strategy that aims to strike the right balance between capturing the perceived worth of services while also keeping customers coming back for more.

Curious to find out how your company could benefit from value-based pricing? Check out our comprehensive guide below:

CTA-what-is-value-based-pricing-and-how-to-implement-it

Radha Patel

Solution Strategist , Pricefx

Radha Patel is a Solution Strategist at Pricefx, with over 7 years of experience as a seasoned pre-sales professional. She has a hands-on approach for solving complex pricing and cross-functional challenges at large enterprise-level companies. This unique exposure to a plethora of industries and customer needs allows her to bring creativity and expertise to each organization she interacts with.