The recent economic downturn has proved that aftermarket services can be a prominent source of revenue generation for businesses. Let's dig deep and learn more about them.
The COVID-19 pandemic has toppled economies of scale and initiated a visible change across industries. Since the pandemic, manufacturers have encountered several disruptions in new equipment orders and capital spending. In the light of such disruptions, aftermarket products and services are gaining the most potent ground and become the stabilizing force for businesses and economies.
Aftermarket services holistically refer to the sale and delivery of maintenance, spare parts, and value-added services. Several manufacturers are seeking revenue opportunities in aftermarket services because of the following reasons.
- Changes in customer demands
- Pressure on pricing structures
- Cyclical fluctuations in new equipment sales
- Increase in market maturity
Customer demands are changing, and this shift has a tell-tale pattern. Customers are emphasizing more and more on service-level agreements (SLAs) that guarantee product uptime. Hence, they seek service providers who can proactively support their equipment before those are out of service, and for that, the customers are willing to pay a premium price.
Aftermarket Services Statistics That Highlight the Importance of the Sector
According to a study conducted by Deloitte, US industrial manufacturers are expanding into the services sector while offering higher margins. For them, aftermarket services have become supremely important, and the revenue contribution due to this sector has also increased steadily.
While in 2005, the operating margin due to product/equipment was 7% and that due to services was 15.5%. By 2008, the operating margin due to product/equipment increased to 7.5%, whereas that due to services increased to 18.2%. In 2018, the product/equipment operating margin was 9%, whereas the services operating margin became 23%. The steady growth of the services operating margin, which has now become more than 2.5 times that of the product/equipment, displays the importance of the sector.
Over the study period, the revenue contribution of the services sector has also increased, however, not as sharply as the operating margins. According to major US industrial products companies whose executive interviews were conducted and financial reports were analyzed, the revenue contribution in the product/equipment sector gradually diminished from 78.1% to 76.4% between 2005 to 2018. On the other hand, the revenue contribution due to the services sector increased gradually from 21.9% to 23.6% between the same period.
Aftermarket services often account for the total amount of profit currently generated by several manufacturing companies. These companies do not dish out new equipment to generate profits. However, this new equipment fuels the future aftersales business on the already installed base. Most of these manufacturers generate 40%-50% of their profits from aftermarket services.
How Are Aftermarket Services Stabilizing Businesses During the COVID-19 Pandemic?
Several large OEMs who have not depended on aftermarket services in the past are slowly understanding the value of the same as a robust revenue stream. It has nudged them to expand their service offerings gradually. Leveraging cloud-based or connected systems can be a great way to provide remarkable aftermarket services to customers. Since the COVID-19 pandemic has caused severe disruption, expansion of aftermarket services does not stand as a choice but as an imperative for manufacturers.
Aftermarket services are a sure-fire way to stabilize businesses during the COVID-19 pandemic crisis. The downturn initiated by the COVID-19 pandemic can be successfully battled by leveraging aftermarket services, and they can also help manufacturers grow their businesses rapidly in the future.
Recurring revenue streams
Some manufacturers are consistently strengthening their service segments. These manufacturers often have 80% of their installed base under service contracts. It will allow them to deliver constant revenue streams.
High margins from spare parts
Since the COVID-19 pandemic has initiated a significant slump in the manufacturing and production industry, the OEMs are looking towards aftermarket parts and services to secure bigger profits. Aftermarket parts and services deliver nearly 50% of the profit to a manufacturer, and the margins are going to increase in the future.
Strengthening customer relations
Aftermarket services are one of the critical areas that help OEMs foster a better relationship with their customers. Their ability to support customers can be done by building trust. And trust-building is possible by supporting longer equipment lifespans during this economic slump. As a result, switching selected customers to usage-based business models will promise recurring cash flow to the OEMs.
Ensuring constant support
In times like these, most customers will prioritize self-service. However, it is more important than ever for OEMs to provide continuous service support to their customers along with seamless remote assistance. It will ensure business continuity.
Staying connected with customers
Off-site service delivery will help OEMs maintain a close connection with their customers. Service technicians are the most important representations of the manufacturers. In times of the recent crisis, their importance is elevated. They need to provide assurance to the customers about giving continuous support and helping them keep the equipment running.
The global pandemic has caused manufacturers to rethink their strategies and develop newer segments to ensure profitability. Aftermarket services are one of these revenue-generating segments that they need to focus on. Within this segment, there are areas like inventory optimization, network optimization, service process optimization, procurement spend reduction, and pricing and terms management, which help manufacturers strengthen their aftermarket offerings.
Aftermarket services are helping manufacturers offset pressures on the original equipment margins since these services are less influenced by changes in the external environment. They will also ensure stable cash flow during times of crisis. During uncertain times like this, postponing the investments in the latest technology can be a valid option for industrial manufacturers. However, they need to maintain existing equipment or selectively invest in upgrades to ensure their aftermarket offerings' quality.