High-tech and electronics companies have long been plagued by thin and falling margins, so OEMs continue to search for ways to fatten margins by serving customers better. One promising ares is after-market services of products, an area that can be greatly enhanced by using emerging technologies including Internet of Things (IoT) and big data analytics. Increasingly, equipment manufacturers are tryng to make downtime a thing of the past.
After market services, including the provision of parts, repair, and maintenance, offer higher and more stable margins than the sale of the products themselves, particularly in servicing industrial equipment. Average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services is 25%, compared to 10% for new equipment, according to one McKinsey analysis that spanned 30 industries.
“For some manufacturers, margins on the equipment are razor thin but margins on service are significant,” said Gary Brooks, chief marketing officer of Syncron, which makes cloud-based service parts inventory, price, order, and uptime management solutions. “Superior levels of service can easily translate increased customer loyalty.”
By levering technology, OEMs can provide aftermarket service while minimizing inventory of parts needed to make repairs. Brooks estimates, for example, that OEMs can hope to increase service revenues by three to 15%; up gross margins by 10 to 40%; and reduce inventory by 15 to 40%. Manufacturers are realizing that they can enhance customer loyalty and brand reputation if they deliver a high level of uptime.
“Leading manufacturers of durable goods (i.e. any piece of equipment that lasts more than five years) want to deliver the ultimate after sales service experience, and maximum uptime,” said Brooks. “Further, orders of durable goods have been incredibly volatile over last couple of years which impact margins so many OEMs are looking to other parts of business to recover those losses.”
Further, improved uptime of expensive equipment remains a competitive advantage that OEMs are using to differentiate their products from the competition. “Whether I’m an airline buyng a plane or a mining company buying machinery that bores into the earth, I’m not buying the equipment but the function that that equipment delivers,” said Brooks. “That means I want it to run as close to 100% of the time as possible. Companies are buying more of a service than a product.”
In the future, equipment uptime will evolve from differentiator to table stakes. “By 2030, the U.S. Department of Labor Statistics estimates that 75% of the workforce will be millennials, who are characterized as quite impatient,” Brooks said. “They are formed by experiences with companies like Uber, Amazon, and Lyft where responses are nearly instantaneous. When equipment breaks, they will expect that it will be fixed almost immediately.”’
The shift in consumer expectations has already begun, and that has changed expectations in business to business truncations as well. “Manufacturers are increasingly focused on delivering what the customer wants: maximized uptime and frictionless service,” said Brooks, adding that these same companies are looking at drones, driverless cars, augmented reality technology and wearables as supporting technologies to improve service as well.
What emerging technologies do you think will support your service business in the future? Let us know in the comments section below.