Leveraging Aftermarket Sales and Service in Industrials
The Importance of Aftermarket Sales and Service for Manufacturers: Manufacturers of durable goods have been steadily capitalizing on aftermarket sales and service to generate revenue. This applies to not only B2C business es like automotive manufacturers, but also B2B entities in the industrial machinery and automation sectors, as well as B2G businesses operating in aerospace and defense.
As you can see in Exhibit 1, below, what was once a mere supplementary business focused on selling spare parts has now evolved into a significant value creator for many manufacturers.
Exhibit 1: Value of Aftermarket & Service Revenues for Industrials Firms
Developing a strong aftermarket presence has three key advantages. First and foremost, it enhances the end-user experience. By offering maintenance and replacement parts, manufacturers can ensure longer product life and improved performance. It stands to reason that the OEM that designed the product will be the most knowledgeable about its maintenance.
Secondly, aftermarket sales and service allow manufacturers to maintain close customer relationships. Regular interactions during the product’s life cycle offer the opportunity to understand ongoing customer needs and influence their decisions.
Lastly, shareholders benefit from increased operational cash flows and reduced risk through aftermarket offerings. Margins on aftermarket services often double or even reach ten times higher than margins on new unit sales. In some cases, aftermarket revenue is contractually guaranteed, providing stable and predictable cash flows.
However, potential pitfalls also exist. Before venturing into aftermarket services, companies must consider how these offerings align with their overall strategy. Failing to address this issue can result in a suboptimal return on investment.
Aftermarket sales and service can be a significant driver of profitability and value creation for manufacturers of durable goods. To reap the full benefits of these offerings, companies must thoughtfully integrate aftermarket services into their product development, sales, and execution processes. By doing so, they can successfully capitalize on the tremendous opportunities that aftermarket sales and service present, leading to long-term growth and competitive advantage.
The Strategic Significance of Aftermarket Sales and Services
Aftermarket parts and services have become essential drivers of success for durable-goods manufacturers. In many cases, they offer the most significant economic returns and value creation. An effective aftermarket strategy can bolster operational cash flows, minimize risk, and enhance customer experiences. However, each company must carefully assess the optimal approach, considering factors like market dynamics, competition, customer intimacy, and integration of aftermarket offerings into core business processes. Companies must be aware that their choices surrounding aftermarket strategies can profoundly impact their overall strategic direction.
Exhibit 2: Hight Share of Aftermarket & Service Revenues for Elevator OEMs
Growth in Aftermarket & Service
Two decades ago, the typical aftermarket offering was reactive and transactional. Companies focused on addressing immediate customer needs like supplying spare parts, repairing faulty components, or training new staff. In recent years, particularly for B2B manufacturers, the approach has evolved, unlocking lucrative opportunities in aftermarket sales and service.
This transformation started gradually with the introduction of new services and upgrades. Further progression led to companies becoming true aftermarket partners, signing contracts that guarantee operational performance and sharing risks with their customers.
Today’s aftermarket landscape is marked by the widespread adoption of advanced technologies, including sensors, big data, and artificial intelligence. These innovations enable predictive maintenance services, manufacturing consulting, and remarkable productivity enhancements. Industrial machinery sensors can create extensive databases that help manufacturers anticipate part failures, reducing downtime. Additionally, these advancements have enabled product features to be offered as services, such as remote activation of additional capabilities in Elevators.
Estimating the Value of Aftermarket Services
Companies can begin by estimating the potential value of their service business. With aftermarket services typically being more profitable than new unit sales, companies can generate substantial profits through these offerings.
Integrating Aftermarket Offerings into Business Processes
To maximize aftermarket success, it is crucial for companies to carefully integrate these offerings into their product development, sales, and execution processes before launching.
Design with Aftermarket in Mind
During product development, manufacturers should already consider the role of aftermarket services for the product. This decision should be deliberate, regardless of whether or not the company chooses to emphasize service as a source of profit.
This is what leading Elevator & Escalator companies do. These products inevitably require maintenance, and, in most countries, are mandated by regulations. In cases where complex platforms or equipment are involved, manufacturers should consider future maintenance contracts during the design and specification phases. Many machinery OEMs have chosen to design complex spare parts using patented materials to protect their aftermarket revenue from service-only competitors. On the other hand, they also designed modular and standardized spare parts to enable warehouse sharing and minimize working capital immobilization for different fleets.
Capitalize on Aftermarket Opportunities
In the sales stage, manufacturers must be able to effectively communicate the value of their aftermarket services to potential customers. This includes showcasing the benefits of maintenance contracts, extended warranties, and other aftermarket offerings that align with customers’ needs and preferences.
By understanding the needs of their target audience, manufacturers can tailor their aftermarket sales strategies to specific customer segments, ensuring greater adoption of their aftermarket services and maximizing revenue potential.
Service offerings are often central to the sales of new units for B2B sector. Factors like cost, service speed, and quality can strongly influence customers’ purchasing decisions. In B2C transactions, consumers might favor a brand with accessible service centers. In contrast, B2B sales pitches often include explicit aftermarket offerings, with organizational buyers requesting service cost estimates and total cost of ownership projections over a product’s life cycle.
Performance-based contracts have become increasingly common in durable-goods sales. These contracts tend to be more successful when the OEM has unique assets, customers with mature and complex equipment needs, expertise in analytics, contract execution, legal matters, and finance, and an unwavering focus on end-to-end customer journeys and system performance. By meeting these prerequisites, performance-based service contracts can lead to better equipment results, lower costs, longer contract durations, and improved insight into customers’ needs.
Deliver Excellence in Aftermarket Service
Once an aftermarket strategy has been implemented, the key to its success lies in execution. Manufacturers must deliver top-notch service that meets or exceeds customer expectations to build long-lasting relationships and drive customer loyalty.
Investing in the necessary infrastructure, technology, and workforce training is essential for providing the high-quality aftermarket services that customers demand. By continuously improving service delivery, manufacturers can maintain their competitive edge in the market, boost customer satisfaction, and ultimately, drive profitability.
When considering aftermarket services, manufacturers should closely examine the expected execution and key performance parameters. However, OEMs may not be solely responsible for reducing downtime, as end users’ actions and expenditures also play a role.
To address these challenges, many B2C companies have established service ecosystems comprising certified repair companies, authorized service centers, and partner financial service providers.
In conclusion, aftermarket sales and services provide tremendous opportunities for growth and profitability in the durable-goods sector. By incorporating aftermarket offerings throughout product development, sales, and execution processes, companies can capitalize on this potential while improving customer experiences and fostering long-term competitive advantages. As a CEO or board member, recognizing and harnessing the power of aftermarket sales and services is crucial for realizing the full potential of your organization’s value creation.
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