Ep14: Ron Giuntini – Aftermarket Solutions Expert

Ron Giuntini is the Principal of Giuntini & Company, Inc. since 1990.  He is in charge of overseeing the day to day business operations, managing various consultants, and heading the business development.  He also founded G35 Software, Inc. in 2016 where they employ a start-up, cloud-based, subscription-free application software which enables B2B sales teams to Configure & Price a Quote (CPQ) engaged in Aftermarket solutions.

In this episode, Ron shares his expertise about the aftermarket servicehis in-depth comparison about subscription and product service models, the challenges involved in developing a subscription model and why you need to involve the leaders and decision makers of the company in the modeling and pricing process.

Tune in and get that one piece of actionable subscription advice that will significantly impact your business. 

 

Why you have to check out today’s podcast:

  • Learn how Ron and his aftermarket service expertise help clients favorably impact the availability, reliability, support resource footprint and capability level of a product or system for an end-user. 
  • Find out why cash flow is a huge challenge in a subscription model and why you need finance people to help you with that
  • Find out why the price is an emotional driver of B2B and B2C brands

 

“You must model your subscription financially to present to your leadership. If you’re interested in moving towards that, you have to have the backup of the CFO because of the risks.”

– Ron Giuntini

 

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Topics Covered:

 

01:12 – Ron defines what aftermarket is all about, what the biggest aftermarket sector is and how massive this industry is

05:29 – Difference between subscription and product as service business models

08:17 – Citing Ron’s reasons why robotics leads the subscription pricing model – protecting the brand and IP

10:56 – Subscription lesson from the Hughes Drill Bit, how it started the subscription model for drill bits

11:39 – The interesting antitrust case of United Shoe Machinery Corp.

13:24 – The reason why robotics leads the ‘product as a service’ model – the original equipment manufacturer (OEM) getting the constant feedback

14:09 – Mark tells value-based pricing as the reason why he thinks robotics leads the ‘product as a service’ model

16:00 – Ron narrates a detailed description of his other company G35

17:07 – Explaining further how the probability analysis in configuring price quotes was done

20:13 – How understanding a customer’s willingness to pay and the manufacturer’s willingness to accept relates in estimating costs

21:41 – Definition of forecasted cost

22:41 – The idea of creating a new company role called “price accounting”

23:01 – Pricing as emotional drivers of B2B and B2C brands

24:07 – Wrapping up with subscription advice from Ron – “You must model it financially to present to your leadership. If you’re interested in moving towards that, you have to have the backup of the CFO because of the risks.  You must model it. That’s my recommendation.”

25:21 – Why cash flow is a huge challenge with subscriptions and why you need finance people to help you with that.

 

Key Takeaways:

“It could sell separately, the hardware and the service. It’s all about protecting your brand and your IP. That’s very, very important.” – Ron Giuntini

“What I would love to see pricing people do is completely ignore cost. Come up with a price, hand it to the finance people and say, can we sell it for this and let finance decide if it’s profitable or not.” – Mark Stiving

“In the B2B world, we have to understand the way buyers make decisions, and we have to think about that. We can’t just rely on the data, which is pretty interesting.” – Mark Stiving

“Never talk about subscriptions without having that model, having developed it and going to the leadership (team). If you don’t, they’ll throw you out of the room and ask you – When you’re an adult, come back.” – Ron Giuntini

“Cost estimation is an art form itself and what always confuses me is that a lot of pricing people don’t really look under the ‘comoda’ in regards to what, what makes up that cost.” – Ron Giuntini

 

Connect with Ron Giuntini:

 

Connect with Mark Stiving

 

Full Interview Transcript

 

Ron Giuntini: Never, never talk about subscriptions without having that model, have developed it and going to leadership. If you don’t, they’ll just throw you out of the room.

[Podcast Intro]

Mark Stiving: Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the synergistic relationship between them. I’m Mark Stiving and today our guest is Ron Giuntini. Here are three things you want to know about Ron before we start. He’s a principal in a company called Giuntini Company. I wonder where they got the name. And has been there since 1990. Wow. In 2016 he founded another company called G35 Software, a subscription company. Wonder why we’re talking to him today? And he’s going to teach me and possibly you about a business called ‘aftermarket’ solutions. While we discussed subscriptions.

Mark Stiving: Welcome Ron.

Ron Giuntini: Hey, thanks a lot, Mark

Mark Stiving: And this is going to be fun. When you first said aftermarket to me, I was thinking of car parts. How far off was that?

Ron Giuntini: Big time. Aftermarket. Again, I specialized in the B2B area. Most people think of aftermarket for what’s called light vehicles, which is the largest aftermarket sector there is, but the B2B, aftermarket for commercial machines is huge, its approximately, $10 trillion worth of commercial machines, United States, and all of them have to be maintained and upgraded, drawing their useful life. So that’s what’s called the aftermarket- the maintenance and the modifications, upgrades of these machine during their useful life. They were around, there’s about $250 billion of spend per year, for this and machines in the United States. And they make up about 30% of the world market. So big picture, talking about maybe $600 billion spend for this year for about $25 trillion worth of commercial machines. It’s huge. I mean, from airplanes, you know, a 200 billion, $200 million seven, seven 67, to a Navistar, a vocational class A truck to a server farm. So it’s pretty massive.

Mark Stiving: Some of these sounds like it makes sense. Those examples were fabulous by the way. I was thinking about automobiles. Of course, we’ve got the aftermarket there. And the fact that there are millions and millions of automobiles means that we built this industry around how do we get spare parts out. And we have spare parts stores and all of that. And as soon as we jump into industrial in my mind I wasn’t thinking we had these massive volumes as in, you know, there’s a lot of airplanes out, but I was thinking more one-off factory equipment. Is there a difference between, say, airplanes and factory equipment just in the number, the volume of the type,

Ron Giuntini: It’s a type, again, commercial airliners limited. I think there’s 10,000 and in the state. And then you have, thousands of different specialized machine manufacturers from the packaging of fish products to making screws for the fastener distribution business. I mean it’s massive. And each one of those to be a player in the original equipment manufacturing area, you must have an aftermarket, a strategy. And it’s all over the place. Some OEMs go directly to the end users. Others go through distribution channels like John Deere would their tractors on the mind. They have a massive distribution network as well as Caterpillar for example.

Mark Stiving: Nice. And so I’m going to tie this back to automobiles only because it’s the only one I really know if that’s okay.

Ron Giuntini: It’s okay. Just for your own information, there are 240 million light vehicles in the United States that are registered.

Mark Stiving: Oh. So it’s probably behaving a lot like the automobile market place.

Ron Giuntini: So 240 million light vehicles is what you call automobiles, which rs SUVs and cars. So that’s huge, but that’s not what I get involved with. Just that’s a B2C.

Mark Stiving: Absolutely. But when I think about what goes on in that market, cause I’m trying to pull the analogy here, when I think about what goes on in that market, the parts manufacturers sell directly to the manufacturer or the automobiles they sell to advanced auto parts, right? So to the service organizations, whether it’s a brand name, so it’s the Lexus service organization or it’s a third-party service organization. And I’m assuming that you have to go through those types of channels as well. Is that true or not?

Ron Giuntini: On the B2B side, there’s a combination. There’s, as you mentioned, there’s the captive at distributors of the Oem’s like your Lexus dealer and then there are independent organizations and then which is changing the entire business model is the whole subscription model or product as a service where things get the channels to get a little strange as they evolve.

Mark Stiving: Okay. Now you’re starting to get me excited. Just pontificate for a second. When you say product as a service, the one that comes to my mind is GE jet engines. What else are you thinking?

Ron Giuntini: Well, there’s a misconception that in GE Engines,   two parts. To product and service, an operating lease and then there’s a service contract to sure. It’s the management of the life cycle of the engine. So when people talked about GE, it’s really a, what they call power by the hour, which is Rolls Royce actually created that term, but it’s a long term service contract that assures the availability of those engines and their minimum downtime over a period of time, usually seven to 15 years. So all the uh, airliner engine manufacturers have had that for since the probably mid-seventies. There have been variations of it. The majority of all engines that are a hung on airliners today have a service contract. Some of them are availability driven. You just pay an x amount of money that have 99.8% uptime or availability and others are just a period base.

Ron Giuntini: So, but every industry is moving. There are robots. The big driver for new models, description or products as a service. Actually, the robotics, a marketplace that’s evolving very rapidly with huge amounts of the IP in bedded in the machines and high tech robotic manufacturers are not, are no longer selling their machines. They’re actually up providing them as a service and charging per hour of use or some kind of output, you know, tons carried or what it moved within a warehouse. So, it’s a whole, the world is changing dramatically. Well, it’s changing, I will call it a little slower because of the business model is very, very scary for the leadership of most original clicker name.

Mark Stiving: Why do you think robotics is leading in this subscription pricing model?

Ron Giuntini: Well two big major drivers first of all the greatest, the value of those machines is basically a firmware embedded software, highly, highly proprietary IP and that’s the major driver for these machines. So they’re not going to sell. First of all, they would, it’d be nuts to cause their brand to be damaged by the users actually trying to change some of this software. So they are protecting it. If you look at the whole cost structure of a, you know, only 20% is actual material, 20 30% the rest of it is IP…R&D and IP. So it’s sort of silly. They and the upgrades are constant on the software upgrades either done remotely or gun on premise. So, and these things will constantly evolve and we’ll be modified some hardware but mostly software. So most of these guys are going, ‘why am I selling this?’ And the customers are going, ‘I can’t, I don’t have anyone to deal with some of this technology.’ So they bundle it and you’re starting to see that now in factories. You’re starting to see that. It was funny, I saw one on people that develop a robot that actually patrols the streets of New York City. And the city pays for per hour of use of these things versus a security guard.

Mark Stiving: Before you shared a second one with me, Ron, I want to make sure I understand the first one. So, I think what you’re saying is because there is a huge service component that is very technical, meaning we need to do regular upgrades, then that’s what may be leading people to say let’s go subscription. Although they could sell that service as a service,

Ron Giuntini: It could sell it separately. The hardware and the service. It’s all about protecting your brand and your IP. That’s very, very important. If you look at most machine commercial machines, especially in the high tech area, most of it is IP is all tremendous amount of IP in regards to R&D that was in that product, so it makes a lot of sense. I’ve been talking about this for 20 years. I’ve been thrown out of board meetings actually on this. And my wife keeps on asking me assuring in a rank business now, but it’s pretty revolutionary. But what’s interesting is you knew who had this model, this subscription model originally? Yeah, you’ll never believe this. It freaks out people, but Howard Hughes’ father created the drill bit to drill through stone to look for oil. He had a patent and he never sold those drill bits. Their huge drill bits. He only rented them and provided them an effect as a subscription. And when parents died. All he did was print money at 25. His parents had both died and that’s what that was actually the foundation of his fortune. A subscription model for drill bit.

Mark Stiving: Wow. Okay. So first we’re going to do a fact check on that. And second, I’m adding that to my subscription pricing class. It’s such a great story.

Ron Giuntini: It is funny. There’s another story is the people, this is all a Yogi Berra. Deja Vu all over again. Yeah. There was the famous, the other thing that everyone listening to this podcast should look at was a famous US shoe machinery company. antitrust suit. US shoe machinery had the perfect subscription product as a service model. What they did was they made machines that fabricated shoes, the United States with the largest shoe manufacturer in the world, mostly in New England, and they had a 95% market share. They never sold their machines. What they did was a charge the shoe manufacturers per shoe manufacturing, it gave him the consumables, install the machines. They did all the maintenance and they charge per shoe. The competitors, this is 1950 or so that their model had been around for a couple of decades. The competitors said you’re antitrust, you’re hurting us because you have a monopoly. At that time, the supreme court protected competitors, not the consumers. The consumers rarely happened. And the Supreme Court, it was a, it’s a major case in all law schools. They basically broke up US shoe machinery or machine company and the shoe industry collapsed after that over two decades. But now the supreme court says as long as the consumer is not hurt, they really don’t give anything about the competitors as long as the consumers. Okay. There’s no antitrust, involved. Right. So it’s very interesting.

Mark Stiving: Did you have a second reason why you thought robotics is leading in the ‘product as a service’ here?

Ron Giuntini: Yeah. Well, again, the technology, so you got the protecting the brand. Those things are very complex and people can do silly things with them. And then they blame the manufacturer for it. So it’s more protecting a vibe and getting the IP, but also the OEM getting constant feedback. That’s one way. If you’re, if you’re managing the maintenance of these machines and you have people on the ground all the time, you’re getting instant feedback, which also feeds into your R & D effort.

Mark Stiving: Okay, so I hate disagreeing with my guess, but I’m not a huge fan of the reasons protecting IP and protecting the brand, although those are pretty reasonable reasons. I love the answer that said, I want more data and more information about my customers because then I can improve my product and my service and I’m going to keep people happier for the long run and it’ll be harder for my competitors to catch me. Let me give you the reason that I really think robotics is leading this. Companies should be using value-based pricing. And value is how much value is my customer going to get out of having my product using my product. And as soon as we think of robotics, they can be applied in so many different places and different ways that each one of those is going to generate a dramatically different amount of value and these companies should be focused on how do I capture more of the value for that application as opposed to for my IP and my hardware. What do you think of that?

Ron Giuntini: I agree 100% I mean, the value prop is it, it’s just like the example I gave you about the robots being leased to the city of New York as an on an hourly basis. All right, but the fee that you’re charging these security guards who are being paid $15 an hour or whatever and they’re charging $11 an hour for these robots to patrol the streets. All right. Even though it might cost them a $1. 25 it’s irrelevant. Yes, absolutely. I agree with you. I, I guess looking at the other aspects of, you know, different strategy.

Mark Stiving: I think the reasons were good. I’m just not sure that I would’ve put those on the top of my list for why, why they go subscription first. But that’s okay. Hey, tell me what G35 does.

Ron Giuntini: Well, we’re a software startup that is focused on providing original equipment manufacturers with application software that enables them to price to configure it and price, quotes for aftermarket a, Bw B aftermarket on the service contract. That’s what it is. Nothing out there that does that. It’s very complex. Lots of risk mitigation, a lot of probability analysis. There’s AI I mean it, it’s, it’s complex when you’re looking at a three to five year, a contract that provides maintenance and upgrades or multiple machines at possibly multiple sites. And ur software, I developed that. I’m working with an organization in the UK where we’re putting together the application software. There’s a lot of code involved I’d been added for a while where we’ve got modules done. It’s been a little slow going. Uh, but, uh, if it was easy, everyone else would be doing it.

Mark Stiving: Exactly. So I think what I just heard you say, and please correct me here if this is not accurate, I think what I heard you say was, if I’m going to go into a product as a service type business, then I’ve got to be able to estimate my costs in order to make sure I’m covering my costs as I price it. And then I’m also going to want to have a configure price quote type system for this B2B market.

Ron Giuntini: That’s correct. And then as a value proposition. So you’ve got to know what your costs are, but the cost, our all-time phase, so, and there’s probability involved. For example, you have to do forecasting unreliability, you have to forecast what the failure rate will be, what the cost of each failure event we’ll be. Okay. Then you have all bunch of indirect costs. That’s the direct costs and indirect costs and enroll them, roll them up. And then you’d have to look at the value proposition. For example, Paris, what’s called swap and somebody, some people may be familiar with that. When you have a computer and you have a hard drive, fails the, you know, HP, whatever. We’ll send you a unit and you would just swap it and you just put it in. Now swaps have the value proposition for a swap is nothing to do with its costs because the customer says, okay, this is, I am plus a hundred dollars you give me a swap for $70 that sounds like a great deal. It might be refurbished or whatever. They really don’t care. They just want to put it in there, but the, the unit may only cost have cost $20 to repair or the OEM. So there’s a lot of variables. I mean theirs is all kind of pricing. This gets really complex in regards to costs. Some items are cost plus some items, our value proposition and you’re dealing with the typical OEM in a service contract. We’ll have a thousand thousands of parts.

Mark Stiving: I have to say two things here Ron, sorry. One, we are not allowed to say the words. Cost plus in a positive way on this podcast

Ron Giuntini: There are some items that given the deficiency make sense on the low-value cost plus,

Mark Stiving: If you could imagine a retailer who has 100,000 SKUs. There’s no way they could do value-based pricing on every SKU. So I’m with you, but you know, tongue in cheek, I avoid that word a lot.

Ron Giuntini: I don’t, I’m not wild about it. But when you’re dealing with an OEM, actually has many OEMs have hundreds of thousands of part numbers. You know, costs plus, and you know, I even talked about pricing on some of those long tail list SKU that doesn’t have much value, I guess make them a dollar a piece. And it doesn’t matter if they close me $3 to $5, it doesn’t matter their long tail on a weighted average. They don’t, they have virtually no impact.

Mark Stiving: The other point that I really wanted to make is the conversation that Ron and I just had. A lot of it was around estimating costs. And just because we’re estimating costs, it doesn’t mean we’re doing cost plus pricing. In every deal that we do. If I’m, if I’m a manufacturer, I’m going to sell something. I want to make sure I’m covering my costs, and so there’s a number that I would call ‘willingness to accept’ just like a customer as a willingness to pay that we’re trying to figure out. We need to understand our willingness to accept which is the floor that we would ever take a deal. How do we do that? Well, we do that by understanding what our costs are, what the required margin would be before we would ever say yes to a deal, and then we try to get some price above that number. Costs are important for us to understand. We just don’t use them to set the price. Is that fair, Ron?

Ron Giuntini: That’s exactly right. Cost estimation is an art form itself and what always confuses me is that a lot of pricing people don’t really look under the ‘comoda’ in regards to what, what makes up that cost.

Mark Stiving: I’d say, well, that doesn’t bug me at all. What I would love to see pricing people do is completely ignore cost. Come up with a price, hand it to the finance people and say, can we sell it for this and let finance decide if it’s profitable or not.

Ron Giuntini: Yeah. The question is who does that? Is that the product manager who wants to, you know, it’s very complex, but what I’m always shocked by is that in the OEM field, the cost is a managerial cost accounting. And that by definition is a forecasted cost. And that has all kinds of ramifications in regards to the acceptable price that finance will accept if the cost is screwed up, which many times it is that, that has huge dynamics involve.

Mark Stiving: Oh, without a doubt, costing is a pain to do. It is inaccurate and yet, and I don’t want to sell something below my cost, so we’ve got to have some guard rail in there.

Ron Giuntini: Yeah. You know, I agree. I spent a lot of time on managerial cost accounting versus financial accounting versus tax accounting. They’re all different and a lot of people don’t follow the differences.

Mark Stiving: I’ve been trying to create a new one. I call it Priced Accounting- what do you need to know to do pricing.

Ron Giuntini: Yeah, well it does, you know, it’s complicated and they really don’t teach pricing per se in a lot of in school. So you get an MBA, you know, basic pricing and a lot of it has to do with B2 C, B2C world pricing is almost an emotional event, B2B people are looking at things completely different. Many cases.

Mark Stiving: Yeah. It’s actually funny because in B2C it’s both really emotional and it’s really not emotional. So it’s emotional and that your consumers are having emotional responses to your prices, but it’s not emotional that the product people have millions of data points and they’re testing price elasticities and cross-elasticities and, and so they’ve completely removed themselves from the customer’s decision.

Ron Giuntini: Yeah. And again, we’ve talked in the past a B2B world, that dataset population is a fraction of the B2C world. Yeah. It has all different dynamics.

Mark Stiving: And then this would B2b, we actually have to understand the way buyers make decisions and we have to think about that. We can’t just rely on the data, which is pretty interesting.

Ron Giuntini: Yup, I agree.

Mark Stiving: So, Hey Ron, this has just been fabulous. I’ve learned a ton and I have loved chatting with you as we wrap this up, what’s one piece of subscription pricing advice that you would give our listeners that you think might have a big impact on their business?

Ron Giuntini: You must model it financially to present to your leadership. If you’re interested in moving towards that you have to have the backup of the CFO because the risks, especially more than one year, their subscription there one year, but those that go out for a couple of years, you must, you must model it. That’s my recommendation.

Mark Stiving: I’m completely with you. Life was so much easier when we just take a big check and ship a product and then have to walk away or get to walk away, I should say. And then now it’s not quite as easy as we do the subscription business.

Ron Giuntini: It is, that’s an absolute right. So that’s, that’s probably the best. That means that you never, never talk about subscriptions without having that model having developed it and going to leadership. If you don’t they’ll just throw you out of the room and ask you when you’re, when you’re adult come back.

Mark Stiving: Okay. Speaking of the model, one more topic that I haven’t talked about on the podcast yet at all, and I’m going to have to bring up and dig into one day, but cash flow is a huge challenge when we go to subscriptions and you need your finance people to help you with that.

Ron Giuntini: Yeah. That’s, that’s why, yet you first have to convince your leadership but then leadership has to convince their investors because that causes some issues on the balance sheet. You might have, you know, obviously when you start a sufficient service, you hemorrhage cash flow wise because you have a bunch of upfront expenses that you don’t have corresponding cash to support. Then you have, you know, revenue recognition issues. That’s another ugly aspect. And then you have, if you have an operating lease, then you have to decouple it, what’s called an embedded lease from a subscription service that gets ugly. But besides that, it’s a very simple transition.

Mark Stiving: Thank you so much for your time today. If anyone wants to contact you, how can they do that?

Ron Giuntini: You can contact me at ron@g35software.com. That’s my email address and an I can follow up from there.

Mark Stiving: And so for the rest of my team and I, we’ve been furiously creating a new course called B2B subscription pricing and we’re going to be looking for a couple of Beta tests and of course we’ll be looking for real paying customers as well. At first, this is only going to be available for live delivery at your facility. If you’re interested would you please drop me a note? I’ll give you the email address in just a second.

Mark Stiving: Episode 14 is in the bag. Ron was fabulous and I learned a ton. I hope you did as well. If you got value out of this podcast, would you please help us out? Subscribe, leave a review, tell a friend. Every little bit helps and we’re extremely appreciative. Please send any compliments, suggestions, or questions directly to me, mark@impactpricing.com. And don’t forget to listen next week for another episode of Impact Pricing.

[Podcast Outro]