A global automotive company, AutoCorp, faced challenges in its aftermarket tire pricing strategy in several countries. Its existing cost-plus approach led to procurement improvements that benefitted clients instead of AutoCorp, and it failed to capitalize on customers' willingness to pay.

AutoCorp partnered with Saphirion to implement a data-driven pricing optimization project for one country within six weeks. The project focused on improving profitability in the country's retail channel through a margin-driven and value-based pricing approach and creating a role model for other countries.

The Non-Linear Performance Pricing (NLPP) methodology was used to analyze several performance and benefit/value drivers and develop target price formulas. During the NLPP analysis, more than two dozen performance/benefit drivers were analyzed like:

• Diameter
• Width
• Weight
• Speed Rating
• Fuel Efficiency
• Load-Bearing Index
• Brand
• Region
• Vehicle Type
• etc.

Saphirion worked with AutoCorp to gather and prepare the necessary data, reflect on market understanding, select key performance drivers, and develop target group-specific pricing.

Of the two proposed pricing strategies, “Tire Brand” and “Vehicle Type,” AutoCorp chose the one that focused on the tire brand as the leading strategy.

Three pricing optimization scenarios were developed within the chosen “Tire Brand Pricing Strategy” affecting 1,599 tire prices:

1. Differentiated Price Increases based on brand categories, which was estimated to yield an annual uplift of approximately €453 (+2.9%)
2. Opportunistic Price Increases where prices are increased up to the respective NLPP benchmark line, which showed a potential annual uplift of €2,340k (+15%).
3. Value-based Pricing, purely following the NLPP value-based pricing formula, leads to significant price adjustments (increases and decreases) to align price and value. The estimated annual uplift is approximately €1,250 (+8%).

Price Performance Graph

Price vs. Delivered Value

Vertical Axis: Actual Sales Price
Horizontal Axis: Delivered Value in %
Coloring: Tire Manufacturer
Dots: Specific tire model

The dots on the blue benchmark line represent tires that deliver 100% value for the paid price, which is fair pricing.

The dots to the left of the blue line deliver less than 100% value for the price paid, while dots to the right provide more than 100% value.

Price vs. Target-Price Graph

Price vs. Target Price

Vertical Axis: Actual Sales Price
Horizontal Axis: Target Sales Price
Coloring: Tire Manufacturer
Dots: Specific tire model

The dots on the blue benchmark line represent tires whose actual price equals the value-based target price, which is fair pricing.

The dots below the blue or green benchmark line are too cheap for the delivered value, while dots near the red line match the market's price limit.

Performance Driver Impact

Performance Driver Impact

The table is sorted by "impact on target price" and shows which performance driver influences the price most.

• Addresses Drawbacks of Cost-Plus Pricing: NLPP helps to overcome the limitations of traditional cost-plus pricing strategies. Cost-plus approaches often fail to capture the full willingness-to-pay from customers and can result in procurement improvements benefiting clients rather than the company.
• Systematic Price Setting: NLPP enables the systematic setting of prices according to a standard logic. It allows the detection of potential price increases or decreases based on a structured methodology.
• Decoupling of Procurement Prices: NLPP facilitates decoupling procurement prices from the final price. This allows for a pricing strategy that is not solely dependent on costs but also considers market dynamics and customer value.
• Automation: NLPP supports a high degree of automation in pricing processes. This leads to more efficient price adjustments and reduces the amount of manual work required.
• Identification of Price Uplift Potential: NLPP helps identify products with potential price increases. It categorizes current prices as "too expensive" or "too cheap," enabling the capture of existing profit potential.
• Consideration of Performance Drivers: NLPP analyzes numerous performance and benefit drivers to determine their impact on willingness to pay. This ensures pricing reflects customers' values for different product features and characteristics.
• Target Group-Specific Pricing: NLPP allows companies to create tailored pricing strategies for specific target groups. By understanding the needs and preferences of different customer segments, companies can optimize pricing for each group.
• Margin Improvement: Implementing NLPP can significantly improve margins. Companies can capture more value by shifting away from cost-plus pricing and towards a margin-driven approach.

By implementing the new pricing strategy, AutoCorp was able to move away from the cost-plus approach, capture margin improvements, and automate price adjustments. This optimized pricing approach considered market information and bonus schemes as well. The project also laid the groundwork for further optimization, including purchase price optimization and automatic price adjustments based on continuously monitored market changes.