Pricing Retrofits in Machine Engineering – The Royal Discipline in Sales and Pricing

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Retrofits in mechanical engineering offer opportunities for companies by closing investment gaps where budgets are tight. What needs to be considered when pricing.

In recent years, many mechanical engineering companies have recognized the central role of the service and spare parts business in securing earnings. Accordingly, the earnings contribution of spare parts and services has been successfully increased. Nevertheless, the frequently cited target of "30 percent of turnover and 60 percent of profit from aftersales" is often not achieved.

On the other hand, budgets for new investments are currently tight in many mechanical engineering customer industries. At the same time, however, substantial opportunities are opening up through the proactive marketing of modernizations ("mods" or retrofits): In many companies, modernizations are not seen as "strategic investments", but as "going concern" or maintenance investments. This means that if funds for strategic projects are cut, there are concrete opportunities for mechanical engineering companies to acquire budgets for maintenance investments.

For machine manufacturers, this creates a new growth logic: those who systematically offer modernizations stabilize business in cyclical markets and anchor themselves more deeply in the installed base.

Prerequisite for Sustainable Success: Consistent Pricing

This requires advanced pricing solutions that ensure yield optimization in the triangle of retrofit pricing, new machine pricing and service and spare parts pricing, while at the same time creating consistency and avoiding cannibalization.

When are modernizations offered? How expensive can a modernization be compared to the purchase of a new machine? How is the price of a modernization determined relative to that of service and spare parts? The optimal pricing system uses elements from new machine and spare parts pricing and is therefore comparable in complexity to advanced methods of value-based pricing.

Customer Benefit Is the Starting Point for Pricing

From the customer's point of view, the economic advantage of retrofits is clear as soon as the benefits are clearly described. A modernization typically requires significantly less than the investment sum of a new machine. It can also be implemented more quickly because the foundation, peripherals, operating expertise and approval channels are already in place. This is particularly important when capex budgets are tight or delivery times for new systems are long.

Retrofit measures also often address bottleneck components: new control systems, drives, sensors or software functions increase cycle performance, improve quality or increase availability. The benefits thus arise from a smaller investment base - and often lead to better ROI values than a complete replacement.

Another benefit lever lies in energy and resource efficiency, as energy prices, material losses and CO₂ emissions have become hard economic factors today. Retrofits that make drive technology, hydraulics or process control more efficient, for example, permanently reduce operating costs and improve the total cost of ownership (TCO) of existing systems. All these additional benefits are also important elements for sales communication.

Three Reference Points: New Machine Pricing, Service and Benefit Orientation

Against this background, retrofit pricing must take three reference points into account at the same time:

1. New machine value tanker: The closer the retrofit price is to the new machine price, the more compelling the need for a verifiable additional benefit (e.g. leap in capacity, new product functions or compliance advantages).
2. Aftersales logic: Many retrofits bundle components that would be sold individually as spare parts or service. Without transparent mapping of this connection, price jumps arise that are difficult for the customer to understand. A modular pricing model has proven its worth: a basic overhaul ensures that the system is maintained (going concern), while optional upgrades address the additional benefits.
3. Benefit orientation instead of cost orientation: The customer does not buy hours and materials, but a measurable result.

Every price decision should therefore be preceded by a business case that translates the retrofit benefits into key figures such as ROI, TCO, payback period, performance increase or energy savings. The more soundly this benefit is quantified, the less the discussion shifts to costs and the more likely a value-oriented argument can be made. For the supplier, this value measurement is also a key instrument for setting retrofit prices that are consistent with the new and spare parts business.

In addition, political funding programs often significantly improve the cost-effectiveness of retrofits. In Germany, for example, the Federal Subsidy for Energy and Resource Efficiency in the Economy (BMWK) grants subsidies of up to 60% of the investment costs, provided that the modernization achieves a corresponding energy saving.

Modernization investments are also supported at EU level - for example through a current initiative by the European Investment Bank, which is providing 17.5 billion euros (~$20.8 Billion) to support over 350,000 companies with energy efficiency upgrades (e.g. via retrofits). Such framework conditions can further improve the ROI calculation and take price pressure off the supplier.

Installed Base is a Strategic Asset

The strategic importance of retrofits as a source of revenue therefore results less from individual projects than from a clear positioning as a provider of integrated system solutions. The basis for this is a defined retrofit portfolio with repeatable, high-value modernizations, standardized value measurement and a consistent price architecture compared to new machines and aftersales. Those who establish this logic turn their installed base into a strategic asset and develop retrofits from reactive individual solutions into a proactive revenue pillar.

Gregor Buchwald is Managing Partner at Prof. Roll & Pastuch. Martin Steinmeyer is Associate Partner at Prof. Roll & Pastuch.