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Dynamic Pricing Is Coming

bill_mcdonough_Dec11 By Bill McDonough, Editor, Body Language

General Motors may have delayed the implementation of their dynamic parts pricing program (MyPriceLink.com), but let’s not lull ourselves into believing that GM is abandoning a program that would give them a tremendous marketing advantage. “Real time” parts pricing is coming soon, and it will require a strong response from the aftermarket parts industry.

Other auto manufacturers are sure to follow GM’s lead. If they can’t keep non-OEM parts makers out of repair shops through patent protection, the manufacturers can almost certainly try to make it economically difficult to compete via price manipulation.

“Dynamic parts pricing is a direct attack on the aftermarket parts industry,” says Ed Salamy, Executive Director of the Automotive Body Parts Association (ABPA). “The manufacturers are creating a guessing game on parts pricing, and they can set the answer to suit their needs.”

According to Margaret Rouse, editor of WhatIs.com, dynamic pricing “is an approach to setting the cost for a product or service that is highly flexible. The goal of dynamic pricing is to allow a company that sells goods or services…to adjust prices on the fly in response to market demands.”1

Dynamic pricing is not a new concept. It was pioneered by the computer industry, including such early leaders as Dell, Inc., who used sophisticated algorithms to predict demand in specific markets and adjusted prices up or down accordingly. We encounter dynamic pricing every day, whenever we reserve an airline flight (lower costs on Tuesdays!) or book a hotel room (rates are based on occupancy rates).

The idea of applying dynamic pricing to the automotive industry is at least ten years old, as evidenced by an article entitled “Dynamic Pricing and the Direct-to-Customer Model in the Automotive Industry,”2 which was published in the Electronic Commerce Journal in April, 2005. Although this study focused on dynamic retail pricing for entire vehicles being sold directly to customers, GM is now applying the concept to parts in the wholesale market.

With the MyPriceLink program GM is essentially telling collision repair shops, “tell us what part you need and we’ll tell you how much it costs.” GM says this will allow the company to provide competitive prices for OEM parts. But it also give the automaker the option to use their “Bump the Competition” calculator to sell parts below cost in order to block the use of aftermarket parts.

One aspect of the MyPriceLink program that has received little attention is how GM might price a part in which there is no competitive aftermarket version available. Will they use the opportunity to boost the price of the part above the “list” price and thus increase their profit? After all, that is what dynamic pricing is set up to do.

What will dynamic pricing mean to the collision repair shop? First, it will remove any certainty as to pricing. A shop will not be able to create an accurate repair estimate without first going through the process of submitting a parts request to GM. Shops will no longer be able to use the estimating software and systems they have become accustomed to over the years, such as Mitchell, Audatex and CCC. And it could play havoc with the shop’s parts mark up, endangering an essential revenue stream.

Consumers will also be placed at risk by dynamic pricing. Yes, the price they will pay for OEM parts might be lower in some instances. But GM could also pump prices artificially higher when the demand for a part increases. For a current example just look at the problems created when the Uber ride sharing program institutes “demand” pricing during peak periods. Users can pay forced to pay up to twice as much as the expected price.

An interesting take on GM’s motivation can be found on the Parts Check Live website blog written by Brad Desaulniers. Brad sees the GM move as a reaction to State Farm’s controversial Parts Trader Program, which has wrested control over parts ordering for many repair jobs and put a dent in OEM parts sales. But he also thinks it is a step toward commoditized pricing of parts, in which pricing will be made based on a supply and demand model. This could push OEM prices lower, but also keeps the door open for moving them higher when demand is increased, such as after a hailstorm.

The auto manufacturers are going to continue to fight the aftermarket industry at every turn in order to protect a highly lucrative and profitable market for them. Dynamic pricing is the latest weapon in their arsenal. But aftermarket leaders have proven resilient and determined in the face of OEM pressure before, and can do so again.

1 Margaret Rouse, WhatIs.com, Nov. 2014
2 “Dynamic Pricing and the Direct-to-Consumer Model in the Automotive Industry,” Biller, Chan, Simchi-Levi and Swann, Electronic Commerce Journal, April 2005

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