Service parts pricing is a very overlooked area in many companies, and there's a lot of value that can be captured in those areas in terms of revenue and profitability. Many companies attempt to work with service parts pricing without having a specialized solution that focuses in on the unique characteristics of service parts pricing.
Some of those characteristics can be parts that are superseded by other parts, part kits, and the fact that there are a large number of inventory items, SKUs sometimes numbering in the hundreds of thousands or millions of parts. And often many companies have very few people that can actually address this in terms of their staffing. So it presents a rather big problem that companies are not really addressing the way they should be.
One of the things in Service Parts Pricing that we find is that for every part there can be an optimal price that can be utilized, but that optimal price can vary depending upon the market segment, the channel, the geography, and various other characteristics such as that.
As we look at some of the challenges in Service Parts Pricing besides the large number of SKUs and typically the staffing constraints that companies face, we also see a lot of issues in terms of understanding the competitive position that a company has relative to other competing companies, as well as after-market suppliers that tend to attack certain areas where they feel that there's an opportunity to exploit overpriced parts in the marketplace.
In addition, with all the parts that exist and based on their form, fit, and function there are ways that we can align parts in terms of their prices, based on those characteristics and make sense out of the fact that if you have a whole bunch of parts that are roughly the same or similar that we can create rules and kind of organize those parts as well as possible to be able to price them and be able to handle them as a group.
One of the other areas that we find to be a common problem is that because of the use of old tools, like spreadsheets and the fact that there are not enough people to cover the vast number of parts that exist, is that companies often use what we call a cost-plus type of pricing approach, where they sort of spread like peanut butter prices based on just trying to attain a certain average margin. One of the problems with that is for items that are underpriced you're basically leaving money on the table. You're missing revenue opportunities and you're hurting your profitability.
In other cases if you're overpriced you find that you're inviting after markets suppliers to come in and attack that marketplace, and when that happens you end up losing market share and of course, having less revenue and less profitability as a result. And understanding what's happening in the marketplace from a competitive perspective, then enables our solution to be able to try to precisely price things from an optimization perspective, and give you a much better result in terms of your profitability and your revenue.
So with our tool we have two or three different methods that we tend to blend together in terms of a strategy for pricing. The first one I mentioned was in parts and alignment basically, where we align parts based on form, fit, and function. We can combine that with competitive price positioning using our patented approach for competitive prices to enable companies to determine where they want to be relative to the market. Do they want to be a premium supplier, an economy supplier, or do they want to price right at the marketplace?
In addition, a third method that we use that we provide is based on price elasticity of demand, where you can basically look at what's happened with parts and parts that have superseded other parts over a period of time. Look at price changes, look at the changes in terms of demand that's occurred, after you've factored in things like seasonality and cyclicality, and be able to use that price elasticity to predict where is the optimal price that you can set for a part where you're going to maximize your objectives, whether that be revenue or profitability.
So with our solution companies really have a single platform and tool in which they have complete vision over all the parts and how they're pricing them.That platform is auditable, and therefore meets some of the requirements that exist for things like Sarbanes-Oxley where people have to have a reliable way of managing their parts and their prices and know how those are going. And with that single tool you can not only set your prices, but then you can communicate those prices out to your customers and to management within the company. So this single solution that we have really allows you to tap into the value that exists in your service parts revenue and really maximize some of the improvements that you need to make in terms of revenue and profitability.