Otis Pricing Spineometer: 2 of 5 Vertebrae

Otis Worldwide Corporation, a global elevator and escalator company, had a challenging FY 2024. Revenue rose 0.4% to $14.3 while operating income fell 8.1% to $2.01 billion over the same period last year.

A review of Otis’s 29 January 2025 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Pricing is a key factor under management concern. Cristina Mendez, CFO, spoke about the impact of pricing on business performance in her opening remarks, stating, “Maintenance and repair sales were up 5.6%, with maintenance benefiting from our continued efforts in driving portfolio growth, together with disciplined pricing strategy. Pricing was up 4 points, excluding the impact of mix and churn.” Her comments were coupled with a directional profit bridge, aka Price-Volume-Mix-Cost analysis or accounting variance analysis, provided in the earnings call. It demonstrates that price has contributed to profitability.

Judy Marks, CEO, added detail regarding price deflation in China, stating, “It has become more challenging over the past three years, as prices have become more competitive. But in a deflationary environment, our team has done an amazing job to get cost out, to get material productivity and to get installation productivity.”

Other issues, such as customer lifetime value, were also clearly on executives’ minds. Judy Marks, CEO, commented on modernization and service, stating, “We are working through our portfolio, and what Cristina and I have tried to make sure the team does is even if that retention rate is going down, we’re getting higher quality in the portfolio, higher profit dollars, and we’re also making sure that we’re net-neutral on our net churn, so that the conversions then become the portfolio growth.”

Otis operates with a roughly 40/60 split between new equipment and aftermarket service sales, respectively. A significant 85% of profits or more come from service.

All these factors provide insight into the pricing capability that would benefit Otis’ financial performance.

Out of Otis’ 72,000 employees, industry benchmarks suggest 30 to 150 pricing professionals. Based on a microanalysis of Otis’ operations, we would expect Otis to employ towards the upper end of this spectrum but not above it. The decisions pricing professionals would guide can be identified in sales, product, marketing, and many other areas.

1. With a large direct salesforce for new equipment sales, new installation sales would benefit from transactional pricing analysis to provide price guidance to the salesforce that delineates expected, good, and bad pricing outcomes. This should be coupled with profit-based incentives to encourage strong price capture on new sales.
2. The pricing of new installations should consider the customer’s lifetime value and incorporate maintenance and modernization efforts. Hear, customer acquisition costs can be contrasted with customer retention profitability to deliver breakpoints in price concessions on new installs.
3. Given that most new installations are delivered in a year but are associated with maintenance contracts that last multiple years, Otis has a situation where index-based pricing on maintenance contracts might be useful for both increasing retention and ensuring profitability. Input costs such as labor costs and raw materials (steel and perhaps materials used in driving electrical motors) are volatile over multiple years. Providing customers transparency while ensuring profitability might be attractive.
4. Otis would benefit from a pricing specialist coordinating new-product-development (NPD) efforts. Two issues regarding their operations make this clear: (1) A little over 1% of revenue is spent on research and development, and innovations should be priced before sales. (2) Otis has also embraced the Internet-of-Things (IoT) movement to monitor equipment performance in buildings. This creates the opportunity for subscription and consumption pricing as well.
5. Geopolitical conflicts between Russia and Ukraine, as well as in the Middle East, impact Otis’s financial performance. Likewise, tariffs and a potential trade war between the United States and China, as well as any other country, would materially impact business performance. These issues raise the importance of applied economics to guide price responses to economic shocks, of which Otis endures many.
6. With a physical presence in more than 70 countries, pricing professionals should be dispersed locally to those countries, working with sales professionals to manage commercial policy aligned with cultural needs.
7. Otis operates in a relatively concentrated with the top five competitors holding more than 75% market share. This would decrease the demand for a pricing team.

Research into the investment by Otis in pricing yielded greatly underwhelming results.

• Only a sole manager of pricing could be identified at Otis. Their career board likewise does not list pricing as an employment opportunity.
• Pricing appears to be the responsibility of salespeople, not counting transfer pricing, which is a tax avoidance decision, not a revenue creation decision.
• Where pricing is a clear responsibility is in estimation engineers. This implies an over-reliance on cost-plus pricing rather than considering the value Otis is delivering to different customers with their advanced and differentiated offerings.

Given the importance and capability of pricing at Otis as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of February 2025.

Otis Pricing Spineometer: 2 out of 5 Vertebrae. No bad pricing decision was identified, and executives clearly understand the importance of pricing, yet the ability of pricing to deliver positive business results at Otis is unrealized.

OTIS (Otis Worldwide Corporation) was relatively unchanged at 96 the day prior to their earnings call to 95 one week later. FY 2024 revenue of $14.3 billion with a 14% operating margin and P/E ratio near 29.

For FY 2024, a 1% improvement in price would yield a 7% improvement in operating profits holding all else constant at Otis.