Increasing profitability through aftermarket sales

No aftermarket IQ!

Selling replacement parts, consumables, accessories, and value-added services is simply not in the DNA of original equipment manufacturers (OEMs). But why would the OEMs be missing out on high margin, low risk, recurring sales? The answer is simple. They are really “new” equipment manufacturers. For OEMs, aftermarket is… an afterthought. Their company’s business processes (i.e. engineering, purchasing, sales, etc.) are all optimized for new product sales. Customer support is treated as a cost to do business when it should, in fact, be a profit center. Without an aftermarket strategy, manufacturers will;

lower profitability ratios
suffer bad reviews / reputation
forfeit recurring revenues

increase cost of goods sold
sell less new products
lose track of clients / installed base

Profitability from product sales typically varies between 6-13% across various manufacturing industries while profitability from aftermarket can typically reach 35-60%.

Size the opportunity and take actions!

Over the useful life of a product, the sum of all the profits from selling parts, accessories, consumables and valued added services will often be greater than the profits made selling the product itself.

The size of the opportunity depends on;

the type of equipment manufactured
the environment where they are deployed
the maintenance requirements
the size and age of the installed base

Find out what would be the impact on your business for each 1% ratio increase?

Below is a quick process to evaluate the size of your aftermarket opportunity. This process can be done for a product line or for all your products simultaneously.

Determine what is the expected life of the products.
Estimate, all the replacements parts, consumables, accessories, and services that would be required each year. Maintenance manuals are a good place to start.
Estimate the market price and net profits for each item and calculate the yearly averages. This is the theoretical upper limit of the opportunity.
Compare your current sales and profits with the upper limits. If your actual to theoretical ratios are below 15%, you are probably below your industry average. If you are above 30%… you are in good shape!

Step by step

Companies often make the mistake to tackle the whole opportunity at once. This will generate a lot of resistance and lower your probability of success. Starting with a pilot project, and expanding to other product lines or sectors is a better approach.

DOs

DON’Ts

Minimize the impact on your current business processes.
Select friendly customers to gather honest feedback on your new aftermarket offer.
Keep it as simple as possible for all the people involved in the pilot. Complexity can be added after the opportunity has been demonstrated.

Try to clean historical data. Draw a line in the sand and start with new products and clean data. You can always go back in time when your aftermarket structure has been stabilized.
Select a high risk / low reward pilot project. Go for the low hanging fruit first and build momentum.
Initiate the project without clear objectives and measurable KPIs. Being able to demonstrate success is key to expanding to other product lines or locations.

What’s next

You probably don’t have enough actionable data to maximize your aftermarket business. You don’t know who is actually using the product, where it’s used, or if it has been properly maintained or upgraded.

In the next blog, we will explain why KONNEK™ SaaS was developed and how it helps in building durable customer relationships. Creating smart connections linking customers, equipment and OEMs is paramount to maximize the aftermarket benefits.