A High-level Overview on Growing Aftermarket Revenue

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For industrial companies, product sales and margins are in a declining cycle. Still, owners and executives are demanding growth. Fortunately, service revenue is delivering the needed boost.

According to McKinsey: “CEOs at industrial OEMs are increasing their focus on aftermarket services — the provision of parts, repair, maintenance, and digital services for the equipment they sold. The appeal of this strategy is simple: services provide stable revenue — and often higher margins — than sales of new equipment.”

At the highest level, achieving service revenue growth consists of two parts:

  1. Determining where your service revenue is coming from
  2. Deciding how to increase the revenue from each product or service.

Determining Where Your Service Revenue Is Coming from

At the top level, service revenue is determined by two factors:

  1. The number of units installed and being used
  2. The revenue generated from each installed unit.

Of course, the long-range total service revenue is impacted by the age, design, operating environment, and routine preventative maintenance of each unit. And some consultants will tell you that it is necessary to look at the revenue generated by each segment or that you should consolidate the installations into granular sub-segments. But, instead of investing much time in performing detailed analyses, it is more beneficial to be pragmatic and break the installed base of each product family into applications or conditions that stress the units approximately the same.

For example, suppose you manufacture 3D printers. In that case, you might decide the best variable to use to segment your installed base is the printed material, melt temperature, or material quantity per part produced.

Once you decide how to segment the installed base, the next step is to calculate the service revenue you earn from each segment. While collecting this data, it is beneficial to tabulate the revenue from each significant service type: parts, service contracts, billable service, training, upgrades, refurbishment, calibration, installing/reinstalling, or consumable items. Analyzing this data will give you a few interesting data points:

  • Total service revenue per unit
  • Total service revenue for each service offered
  • Total service revenue per unit in each segment
  • Service revenue per unit for each segment and each service

By comparing the data on a per-unit basis, you may identify less reliable products or applications that cause an unusual number of failures compared to other applications. This data can lead to upgrades or refurbishments, creating service revenue and improving customer satisfaction.

You will see other insights, but first, let’s discuss the prerequisites for growing service revenue.

Deciding How to Increase the Revenue from Each Product or Service

When customers consider purchasing any service or product, they calculate the value they receive from each option. They ensure that the quantified benefits (in dollars) exceed the purchase cost. For you to deliver this value, you must fall in the “sweet spot” on this Venn diagram:

FullHD_Venn1.jpg - a few seconds ago

Therefore, as you look at the service revenue sorted by service type data, you should compare all products and segments to identify the outliers. You may find that your prices are out of line or your offer does not meet customers’ needs. Looking at the “all products data,” you should examine if your selling process or salespeople meet your requirements. And finally, you must be careful how you look at the installed base data to ensure that the salespeople can reach out to all customers and know which products they are using and what experiences they had with your service department.

Having an accurate install base data set is possibly the trickiest task because dissatisfied customers will usually provide helpful feedback on the services they receive or are offered. But if you are not providing any offers to a customer because you do not recognize that they exist, then there will be no feedback.

How Likely Am I to Have Missing or Dirty Installed Base Data?

More than you think!

When I managed a service business, we annually sent a mailing to all our customers. About 10% were undeliverable. I shared that number with some of my peers in other companies, who all confirmed that we were typical.

As another recent example, RT Insights published an article in late February 2022 that said: “… according to a study by HFS Research, 75% of business executives do not have a high level of trust in their data, and 70% do not consider their data architecture to be ‘world-class.’”

I am dwelling on this point because we rarely think about data accuracy, but poor data accuracy can hold your revenue growth efforts back.

Actions to Take After You Are Sure You Are Reaching All Your Customers

Now that you reach all your customers and know what equipment they have, you can start making sure that your offers, prices, and sales processes are all on target.

The last thing I can say to you is good selling.

Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their services revenue and profitability. He applies the methodologies and techniques associated with the Customer Value Creation and Customer Experience professions to assist his clients in designing and commercializing new services and the associated business transformations. Contact Sam here.

Image Credit: MIND AND I/Shutterstock.com

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