Spare Parts Pricing Strategy

Spares Parts Pricing
Proprietary Part Segmentation and Pricing
Date

3
Client X Aviation Services division needs to reevaluate its proprietary spares
pricing strategy because it is currently experiencing:
Decreased revenue due to an inability to realize full price in part segments where Client
X Aviation Services has dominant market position
Decreased revenue from lost market share on part segments where Client X Aviation
Services has failed to respond to competitive pressures
Lower earnings due to lack of focus on profitable segments and high cost structure to
maintain unprofitable ones
Lower earnings due to misallocated inventory resulting from limited knowledge about
current supply e.g. surplus market and market trends e.g. Model X retirement
Opportunity: to address these issues, Client X Aviation Services must develop a strategy focused on part segmentation
and market-based pricing
Note: for an overview assessment of the Aerospace Client X Proprietary spares market, please see Appendix 1
This document is a partial preview. Full document download can be found on Flevy:
http://flevy.com/browse/document/spare-parts-pricing-strategy-731

6
In order to develop market based pricing, we must first align parts by segments
that are based on competitive position
This exercise is the main focus of this project
Total Universe of
Aerospace Client X
Proprietary Parts Segment parts based on
customer purchasing
patterns, internal
categorization, and
external competitive levels
Segment A
Segment B
Segment C
Segment D
Segment E
Segment F
Segment G
Segment X
.
.
.
Product offering and pricing recommendation
• Strong competitive position - raise prices
• Some fragmented competition - maintain prices
• Stronger competition - lower prices to gain share
• Extreme competition - raise prices as exit strategy or
consider alternative revenue model e.g. licensing

9
Mixed WeakStrong
Structures
Power Plant & Electrical Systems
Controls, Avionics & Instruments
Landing Gear
Interiors & Cargo
Non-Electrical Systems
MD A, MDB
MD C
MD D
MD E
MD F
MD K
MD K2
MD K3
MD K4
MD M
NARROW WIDE
We analyzed “loyalist” and “shopper” customer purchasing patterns along
the following dimensions to identify trends…
Part Type**
* Denotes small change (increase) due to addition of <$1K parts
** Appendix 2 provides descriptions of these part type categories
Customer Purchasing Patterns for Aerospace Client X Parts:
*
*
6 categories consolidated from Aerospace Client X’s 25 part
codes

12
Aerospace Client X sales information (19** to 19**) validated the distinctions in
our segments by revealing differences in the level of Aerospace Client X sales and
market share
Old Structures $628
New Structures $ 8
Power Plant $289
Old Avionics $ 249
Wide Body Land Gear
(components) $ 78
Narrow Interior $ 95
19**-19**
Aerospace
Client X
Sales ($M)*
* Sales represent all Aerospace Client X proprietary sales to the top 20 customers for
19** - 19**
New Avionics $ 12
Non Electrical Systems $ 98
$ 179Wide Body Interior
$ 146
Narrow Land Gear
(components)
33%
0%
15%
13%
4%
5%
1%
5%
9%
8%
%
Aerospace
Client X
Sales
Specific findings by segment
• Strong, consistent sales
• Reductions in 19** due to MD A decreases
• Low sales - opportunity to grow with market
• Medium to strong and increasing sales
• Medium sales -- higher purchasing $ on MD K
• Medium sales - influenced by upgrade option
• Medium sales - influenced by rotable pools
• Reductions in 19** due to MD A decreases
• Low sales
• Opportunity to grow share as market grows
• Low sales
• Medium volume of parts sold at low unit price
High
High
Medium
Medium
Low
Low
High
Low
Medium
Medium
Aerospace
Client X
relative
market share
* Reference Appendices 3 and 4 for detailed sales and segment data

15
Consumption date (Customer B) further validated the segments by indicating
that customers tend to concentrate purchasing from Aerospace Client X within
certain segments
Old Structures
New Structures
Power Plant
Old Avionics
Wide Body Land Gear
(components)
Narrow Interior
Customer B
purchase $
from
Aerospace
Client X
* Sales reflect non-Aerospace Client X volume times Aerospace Client X average price
New Avionics
Non Electrical Systems
Wide Body Interior
Narrow Land Gear
(components)
Customer B
purchase $ from
non-Aerospace
Client X sources*
• Large dollar structural spares are bought from Aerospace
Client X, while customer tends to go elsewhere for < $1000
parts
$ 4,700,000
$ 57
$ 2,200,000
$ 800,000
$ 2,900,000
$ 1,300,000
$ 140,000
$ 2,800
$ 750,000
$ 610,000
$ 5,600,000
$ 0
$ 730,000
$ 140,000
$ 1,300,000
$ 620,000
$ 1,000,000
$ 0
$ 510,000
$ 400,000
Specific findings by segment
• Fairly small new airplane fleet (7 – MD Fs)
• May have limited need for new structures now
• Dominant Aerospace Client X purchaser
• Strong Aerospace Client X purchaser for MD K1 and
MD models
• Large purchaser for MD K1 repairs of avionics
• Consistent purchaser for MD fleet from Aerospace Client
X
• Low purchaser of MD K1 parts from Aerospace Client X
• Limited new airplane fleet may account for low sales
• Split purchases for MD and MD C fleet
• Largely low dollar items being purchased
Note: Consumption data, where available, only reflects a sample of parts and does not provide accurate insight into alternative sourcing choices
(see Appendix 8 for complete list of data caveats)

18
Client X Aviation Services sales data was reviewed to ascertain specific findings
that would affect segment recommendations
Low dollar (<$1K)parts drive a majority of spares volume, but a moderate amount of overall sales
7.5 million low dollar spare parts make up 95% of spares volume but only 34% of total sales
303,000 high dollar parts account for 66% of total sales
Overall reductions in spares sales of 7% from 19** to 19** have largely been driven by MD A (-42%)2 and MD B
(-14%) decreased spares sales
Reductions have been partially offset by increases in MD C (+27%) and MD M (+111%) spares sales
Customers exhibit “loyalist” or “shopper” purchase patterns for Aerospace Client X parts within a specific model,
but inconsistently across models
e.g. American buys 3X the average spares per plane for MD A, but less than average for MD B
There are examples of specific parts within models where Aerospace Client X appears to have dominance
e.g. MD C windows and MD K interior parts
1 19** - 19** sales data including sales for top twenty customers
2 Key airlines are “turning over” their MD A fleet e.g. American selling to Third World airlines -- see Appendix 6

21
In summary, a review of the strategic opportunity within each of the product
segments yielded four distinct pricing recommendations
High Medium Low
AerospaceClient
X
M
arketShare
**
M
arketSize**
AbsenceofClient
X’sAircraft
maintenance
software
Competition
Purchasing
Volumefrom
AerospaceClient
X
Old Structures
Strategic Opportunity
New Structures
Power Plant
Old Avionics
Wide Body Land Gear
(components)
Narrow Interior
19**-19**
Aerospace
Client X
Sales $M *
New Avionics
* Aerospace Client X sales represents three year sales of Aerospace Client X proprietary parts to top 20
customers
** Based on qualitative analysis of Aerospace Client X sales *** Based on consumption and
Pricing Recommendations
A
• Aerospace Client X appears to have
dominance
• Raise prices with minimal fear of
competitive reaction
Wide Body Interior
Narrow Land Gear
(components)
B
• Limited competition
• Lower prices slightly to encourage repairs
rather than complete upgrades
D
• Extreme competition
• Raise prices as an exit strategy
• Lower market share and reduce inventory
C
• Some competition
• Maintain prices
• Grow market share on target customers
$628
$ 8
$289
$ 249
$ 78
$ 95
$ 12
$ 98
$ 179
$ 146
Customer
Propensitytobuy
from
Aerospace
ClientX***

24
If positioned appropriately, the pricing recommendations can have a
considerable and positive impact on Client X Aviation Services ’s annual pre-
tax earnings
$M
Pricing
Action
Revenue
Increase from
Current Sales
(annual)
Revenue
Increase from
New Sales
(annual)
Cost
Reduction
(COGS4
&
Infrastructure)
Impact on
Pre-Tax
Earnings
(annual)
Pricing A
Raise prices 5-10% $50 - 100 $0 $0 $50 - 100
Pricing B
Lower prices 3 - 5% ($ 5 - 10) $20 1 ($10) $ 0 -5
Pricing C
Maintain prices $0 $10 2 ($5) $5
Pricing D
Raise prices as
exit strategy
40-50% $80 - 100 ($120) 3 $90 $50 - 70
TOTAL $120 - 195 ($90) $75 $105 - 180
1
Assumes 5-10% growth in market share due to competitive pricing
2
Assumes 10% growth in market share -- targeted at specific customers
3
Assumes 50% reduction in market share
4
Assumes 50% COGS margin
Client X Aviation Services Annual Income Statement Impact (select items)
The goal for Client X Aviation Services should be to increase profitability, not only market share across the part segments
Note: this represents an after tax earnings increase of $65 - 110M

27
In summary, pricing is an important differentiator that must be combined with
availability to successfully position spares in the market. Therefore, Client X
Aviation Services must:
Segment parts
Understand Client X Aviation Services ’s current position within specific areas of the market
Focus on effective pricing and positioning targeted at profitable growth
Adjust prices per competitive position
Raise prices on segments where Client X Aviation Services has a strong position
Raise prices where unprofitable - as exit strategy
Lower/maintain prices where competition is high
Differentiate product further in competitive and high margin segments
Make sure the parts are available -- this is a key competitive variable in the marketplace
Communicate/market more proactively, especially to key customers
Target key customers with mutually beneficial packages
i.e. build Aerospace Client X-customer relationship
Use price and availability as levers to gain demand information and volume

30
The following implementation approach will enable Client X Aviation Services
to establish a market-based pricing baseline
Implement pricing recommendations
Make pricing changes for 20**
Refine prices/catalog for 20**
Identify impacts to inventory
Develop marketing and communications plan
Develop customer segmentation approach
Evaluate and improve inventory levels and availability
Establish mechanisms to track segment profitability
Concurrent with establishing the baseline, Client X Aviation Services should focus on improving
delivery capabilities
e.g. availability and developing customer-specific solutions
Baseline Implementation details follow

33
Inventory implementation steps:
(assessment of impact due to pricing changes)
Review inventory levels by segment
Identify part volume by segment
Identify part value by segment
Assess issues with current inventory levels by segment
Identify key shortages
Identify excess inventory and other demand imbalances
Identify new inventory requirements (by segment) from pricing changes
Category D: lower inventory/fill rates to minimum levels
Category A: hold low dollar part inventory and ensure quick availability of high dollar parts
Categories B & C: review demand patterns and redefine inventory fill rates
Identify process to improve inventory with segment managers (see pricing implementation)
Work with customers and/or suppliers to forecast demand more accurately
--especially on high margin parts
First, focus on Category B & C parts with higher competitive pressure
Next, gain insight into remaining categories Category Segments
A Structures, Powerplant, Wide-body interiors
B Old Avionics
C New Avionics, Landing Gear
D Narrow interiors, Non-electrical systems

36
With the pricing baseline in place, Aerospace Client X should segment its customer
base in order to develop targeted approaches to grow valuable accounts
Spares Customer
Base
(ranked by sales of
Aerospace Client X
Proprietary Parts)
“Premier” Customers
Potential criteria:
- Top 20-30 spares revenue
- Highly profitable purchasing
- Loyal airplane purchasers
- Strategic situations
“Standard” Customers
Potential criteria:
- Average spares revenue
- Irregular airplane purchases
- MROs
• Target discount packages by model or part
category
• Potentially no charge for AOG
• Sell at list price/standard quoted price only
• Potentially charge for AOG
This is a notional illustration of how Aerospace Client X may segment spares customers

39
As an example, a package for Customer D could focus on segment-specific price relief
in exchange for targeted increases in segment-specific volume
Annual
Sales from
Aerospace
Client X
(3 yr average)
Annual Sales
from
Aerospace
Client X with
new price
baseline
Discount
package
component
Discount
package
impact
(price only)
Discount
package
impact
(price & volume)
Old Structures $ 15.8 M $ 17.4 M 5% (price) $ 16.5 M $ 16.5 M
New Structures $ . 1 M $ .1 M 5% (price) $ .1 M $ .1 M
Power Plant $ 8.6 M $ 9.4 M 5% (price)
` 5% (vol.) $ 9.0 M $ 9.5 M
Wide Body Interiors $ 5.0 M $ 5.5 M 5% (price)
` 5% (vol.) $ 5.2 M $ 5.5 M
Old Avionics $ 8.0 M $ 7.6 M 15% (vol.) $ 7.6 M $ 8.7 M
Narrow Land Gear $ 5.6 M $ 5.6 M 15% (vol.) $ 5.6 M $ 6.4 M
Wide Body Land Gear $ 1.2 M $ 1.2 M 15% (vol.) $ 1.2 M $ 1.4 M
New Avionics $ .2 M $ .2 M NA $ .2 M $ .2 M
Narrow Interiors $ 4.7 M $ 6.6 M 30% (price) $ 4.6 M $ 4.6 M
Non Electrical Systems $ 2.4 M $ 3.4 M 30% (price) $ 2.4 M $ 2.4 M
TOTAL $ 51.7 M $ 57.0 M $ 52.4 M $ 55.3 M
Delta receives “flat” price on current purchases Aerospace Client X receives increased volume of $3M
Customer D Discount Package - example

42
Appendix 1: Aerospace Client X Proprietary spares market assessment
Market Assessment
Inefficient supply and demand
•Definition: Aerospace Client X proprietary
spares
•Size:
• $2.5B annually
• Growth rate of 4.1%
•Key Characteristics:
• Lack of consistent, accurate information
• Fragmented supply and demand
•Trends:
• Longer plane “life cycles”
• Strategic alliances to provide solution
• “New” customers - 3rd parties, alliances
• New distribution channels e.g. internet
Competitor Assessment
Low supplier power
• Definition: Client X’s Aircraft maintenance
softwares, Distributors (as channel) Surplus
market
• Size:
• Few large suppliers
• Many small-sized niche players
• Product position:
• Pricing - varied (often reactively competitive)
• Availability - reliable on specific parts
• Quality - varied, but improving
• Strengths:
• Specific part-type focus (proactive forecasting)
• Availability
Client X Aviation Services Internal
Assessment
Inconsistent product positioning
•Size:
• 65% of market share
• Declining share
•Product position (perceived in market):
• Price - high, not market-based
• Availability - inconsistent, mediocre
• Quality - high
•Strengths:
• Design owner
• Customer relationships via airplane sales
•Weakness: little/no consistent differentiation
Customer Assessment
Medium bargaining power
•Definition: Airlines, MROs, Leasing cos
•Size:
• Top 20-30 -- 75% of revenue
• Many smaller-sized customers
•Product characteristics:
• Critical to customer
• Value proposition differs across customers
•Trends in purchasing:
• Complete solution
• Longer-term contracts
• Reduced inventory

45
Appendix 2: Spectrum of Loyalty Across Aerospace Client X’s Top
Customers
Estimated Demand Aerospace Client X Prop. Estimated
Airline
(Client’s Customers- Deleted to protect client
confidentiality
for Aerospace Client X Parts Parts Sales Aerospace Client X Share
$30m $45m 147%
$23m $29m 123%
$72m $73m 102%
$101m $98m 97%
$23m $23m 96%
$30m $28m 92%
$110m $80m 73%
$39m $27m 68%
$34m $23m 67%
$86m $51m 59%
$36m $21m 57%
$164m $93m 57%
$28m $16m 56%
$86m $47m 55%
$18m $10m 54%
$40m $20m 51%
$42m $21m 49%
$60m $29m 48%
$73m $34m 47%
$32m $15m 45%
$67m $24m 36%
$102m $34m 34%
$42m $13m 31%
$193m $59m 30%
$93m $25m 26%
TOTAL $1,627m $936m 57%
NOTE: Demand for parts calculated by multiplying airline maintenance budget by estimate of Aerospace Client X parts purchases as a percentage of budgets
Sources of maintenance data:19** DOT Form 41 Filings, International Civil Aviation Organization 19** inflated to present
19** 19**

48
66% of revenue comes from parts priced greater than or equal to $1,000
96% of volume results from parts that are priced below $1,000 each
Appendix 3: Spares Sales by Part Price
TOTAL SPARES SALES
Category Total Sales Total Parts %sales %volume Ave Price/Part
0 - $1000 643,528,321.00$ 7,441,248 34% 96% 86.48$
$1001 - $2000 220,834,668.00$ 157,389 12% 2% 1,403.11$
$2001 - $3000 137,704,622.00$ 56,218 7% 1% 2,449.48$
$3001 - $4000 97,557,568.00$ 28,346 5% 0% 3,441.67$
$4001 - $5000 62,658,115.00$ 14,053 3% 0% 4,458.70$
$5001 - $6000 55,009,140.00$ 10,025 3% 0% 5,487.20$
$6001 + 695,083,604.00$ 36,960 36% 0% 18,806.37$
1,912,376,038.00$ 7,744,239 100% 100%

51
Appendix 4: Spares Segment Volume and Sales Broken down by Part Price
Parts with Price Greater Than or Equal to $1,000 Each
Buckets 19** Sales 19** Sales 19** Sales Total
28,364,600.46$ 43,882,351.47$ 36,740,659.22$ 108,987,611.15$
Controls New 2,020,303.00$ 3,089,195.00$ 6,280,195.00$ 11,389,693.00$
Controls Old 48,124,235.87$ 68,176,972.86$ 60,714,097.49$ 177,015,306.22$
Interiors Narrow 8,470,787.10$ 12,629,164.20$ 13,327,582.48$ 34,427,533.78$
Interiors Wide 24,665,957.65$ 36,491,733.20$ 31,386,322.10$ 92,544,012.95$
Landing Gear Narrow 23,796,433.00$ 48,032,685.20$ 37,506,341.00$ 109,335,459.20$
Landing Gear Wide 15,260,746.60$ 22,165,016.72$ 20,647,624.70$ 58,073,388.02$
Non-Electrical Systems 15,759,371.48$ 24,041,571.75$ 22,609,568.95$ 62,410,512.18$
Power Plant 43,237,648.48$ 71,233,385.90$ 84,840,588.80$ 199,311,623.18$
Structures New 970,453.00$ 1,241,333.00$ 2,148,123.00$ 4,359,909.00$
Structures Old 115,576,883.51$ 154,736,989.68$ 141,071,804.16$ 411,385,677.35$
Totals 326,247,420.15$ 485,720,398.98$ 457,272,906.90$ 1,269,240,726.03$

54
26%
19%
33% 38%
58%
41%
30%
55%
31% 35%
14%
Appendix 5: Client X’s Aircraft maintenance software/Distributor Quote Overview
20%
MDCMDK
54%
28%35%
67%
7%
Controls Interiors Landing Gear
Non-Electrical
Systems Power Plant Structures
MD
Widebodies
Aerospace Client X Price

57
Controls
Interiors
Landing Gear
Non-Electrical Systems
Power Plant
Structures
28
7
59 1,155
25
1,120
3,372
61%
22%
41%
25%
8%
20%
7%
11
14%
30
61%
6,539
39%39%
25
100%
77
13%
29%
44
3%
8
7% 40
20%
580
345%
Appendix 5: MD Model Proprietary Parts Quotations (relative to Aerospace Client X
Price)
31 33 33 151 1,517 2,890 4,031
4 3,350
310
7
86 200 283 870 2,483
237 974 2,170 18,983
44 7952 7,845238
29%
97%
36% 29%9% 22%
202%
29%
53%
20
75%
168%
9%
80%
11%
29%
16%
29%
127%
51%
25%
89%
35%
29%
28%
29%
79%
40%
62%
43%
27%
61%
26%
56%
48%
29% 34%
38%
30%
27%
Key
New Part
Surplus Part
Weak Aerospace Client X Position
Strong Aerospace Client X Position
Notes:
1. Quoted prices are shown relative to Aerospace Client X’s Part Price
2. Graphical scales are illustrative

60
Appendix 6: MD A Analysis – Rapid Decline in Customer Spending
Many top spares customers DECREASED their MD A purchases by over 70% in the last three years
Customer 19** Sales 19** Sales 19** Sales Total % Change 19**-19**
$ 651,254.21 $ 737,295.30 $ 289,711.40 1,678,260.91$ -56%
$ 615.90 $ 41,447.20 $ 7,403.50 49,466.60$ 1102%
$ 66,062.70 $ 85,512.40 $ 59,016.90 210,592.00$ -11%
$ 20,052,523.17 $ 20,121,903.50 $ 5,989,621.95 46,164,048.62$ -70%
$ 607,174.90 $ 448,190.50 $ 417,318.11 1,472,683.51$ -31%
$ 1,778,510.54 $ 2,889,970.06 $ 1,830,427.60 6,498,908.20$ 3%
$ 10,103,641.43 $ 13,071,493.43 $ 7,571,092.33 30,746,227.19$ -25%
$ 7,732,269.10 $ 7,884,300.09 $ 3,503,332.00 19,119,901.19$ -55%
$ 11,496.10 $ 17,318.90 $ 15,468.20 44,283.20$ 35%
$ 116,088.40 $ 199,627.65 $ 204,164.00 519,880.05$ 76%
$ 293,998.20 $ 468,793.20 $ 445,822.00 1,208,613.40$ 52%
$ 5,134,781.39 $ 3,022,394.50 $ 2,103,160.90 10,260,336.79$ -59%
$ 170,030.60 $ 290,022.66 $ 303,399.40 763,452.66$ 78%
$ 2,167.20 $ 1,950.80 $ 48,416.40 52,534.40$ 2134%
$ 67,276.70 $ 88,354.38 $ 10,549.00 166,180.08$ -84%
$ 415,512.80 $ 492,599.20 $ 559,041.60 1,467,153.60$ 35%
$ 973,106.10 $ 275,681.11 $ 279,413.08 1,528,200.29$ -71%
$ 3,184,337.37 $ 6,842,063.52 $ 6,355,854.66 16,382,255.55$ 100%
$ 1,674,695.85 $ 2,692,215.50 $ 3,155,712.40 7,522,623.75$ 88%
$ 571,632.20 $ 729,343.40 $ 1,644,677.80 2,945,653.40$ 188%
TOTAL 53,607,174.86$ 60,400,477.30$ 34,793,603.23$ 148,801,255.39$ -35%
(Client’s confidential
information – Deleted)

63
Appendix 7: Spare parts price catalog recommendations
Old Structures
New Structures
Power Plant
Old Avionics
Wide Body Land Gear
(components)
Narrow Interior
No. of Parts
>= $1,000
New Avionics
Wide Body Interior
Narrow Land Gear
(components)
Number Parts
< $1,000
3,720
120
1,249
401
1,604
723
647
73
361
865
Remove ALL high dollar items
Catalog Recommendations
Remove high dollar and slow moving items
Remove high dollar and highly variable (priced) items
Remove most items from catalog with intent to
greatly increase prices and move inventory out
16,429
420
7,234
3,284
5,186
2,830
2,432
46
2,830
4,217
Implementation:
Pricing

66
Appendix 8: Consumption data caveats
Data greatly differs in content and quality across the airlines:
Customer B data was a sample of 80,000 expendable parts that were purchased over the course of two years
Customer A data consisted of a small sample of 861 parts that were generated from historical sales**
Customer 4 data provides actual internal consumption from Customer 4 stores to line stations – does not provide
yearly sales
Data does NOT include parts that are self-fabricated (except for Customer 4 data)
In all cases the data contained standards, vendors, and proprietary part numbers
Difficult to segregate proprietary parts purchases from others
Aerospace Client X part number, description, and average part price were used to perform analysis
Data includes only airline part number and quantities purchased or consumed
Does not indicate average price paid or source of part purchase
Does not provide any categorization or description of part
For parts not purchased from Aerospace Client X, the Client’s average price for these parts was used as an estimate
* Data was received for Customer A, Customer B, and Customer 4
Although other consumption data is reportedly available, these three airlines were the only ones obtained
** Due to the small sample of parts from American, no substantial analysis or recommendations were based on this data set

1
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