Often the most profitable, yet most neglected, portion of an industrial equipment company’s portfolio is its range of aftermarket solutions, such as replacement parts and repair services. Typically a captive market, aftermarket parts and services offer significant profit margin potential, yet the attitude most often in place at industrial equipment firms is that such sales “just happen” and there is not much that can be done to influence them. This attitude overlooks the great improvement that even a small increase in aftermarket sales can provide to the bottom line.
You may wish to make your spare part kit a little better organized than this. Photo used under Creative Commons License: http://www.flickr.com/photos/coweater/ / CC BY-SA 2.0
Opportunities exist in both parts and services, but the challenges faced in recognizing these opportunities do differ. Parts offer the potential for higher margins, but pressure on costs and inventories at manufacturers often limits their desire to hold spare parts. The margins on services (like repair, inspection, installation, etc.) are often capped, as it is easier for a customer to understand and thus negotiate rates on labor, travel, and the per diem allowance. Thus, the approaches to realize this untapped potential differ for parts and services.
There are a couple of generalizations about industrial customers that should be understood before plotting an aftermarket strategy. First, it is generally easier to add a small amount of funding to an existing project or appropriations request than to start a new one. Second, many industrial companies believe they can do their own maintenance, yet have cut such staffing to the bone. Finally, unplanned downtime creates urgency, recognition of what production time is really worth, and a temporary willingness to spend to get production re-started and avoid future issues.
The goal in driving aftermarket success is to accelerate the rate at which purchases are made (for example, by having the customer purchase parts before they are needed) or gain revenue through value-added services where the cost can be controlled. There are numerous familiar examples that can be drawn from the consumer-marketing world, some of which apply directly to industrial products. Such examples include:
- Extended warranties – these play to the fact that it is easier to gain additional funding for existing projects, and are particularly appealing where the customer has limited experience with the type of equipment being provided (much as consumers are more willing to buy an extended warranty with their first plasma television).
- Spare part kits – again, when provided as an option on the initial purchase, it is much easier to get funding for such kits approved.
- Expediting fees – when a customer is down, it is reasonable and maybe even expected that you would offer rapid delivery at a higher (but not outrageous) fee.
Some of the examples are less obvious, but still value, and largely revolve around being able to plan and control your labor costs in providing services. Some of these ideas include:
- Service contracts – when you have a sufficient number of contracts in a given region, you can spread the often-overwhelming travel costs over a number of contracts, thus making the price and your margins reasonable. The key is to be able to control the service or inspection schedule such that the travel costs can, in fact, be predicted and controlled, and to convince the customer that your “expert” staff can provide better results than their stretched in-house maintenance team.
- Inspections – while you may only be able to charge a nominal amount for inspections, you can often make recommendations on repairs or spare parts that can make up for the slim margins on the inspection itself. At a minimum, any service call should include an inspection with recommendations on spare part purchases or repairs.
- Exchange programs – for standardized and portable equipment, offering an exchange program, whereby you replace a unit being repaired with a “like new” substitute, can provide both the urgent response the customer needs and good margins. The exchanged units can be repaired at your leisure, and held for future exchanges.
- Overhauls – often, if a unit is being repaired in the field or has been shipped to your facility, you can offer the customer a more thorough overhaul of the equipment (replacing wear components, tightening adjustments, etc.) at a reasonable incremental price.
Does anyone have experience with having developed better aftermarket approaches for industrial equipment or similar sectors? Have you seen challenges applying the above approaches?
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