For OEMs to capture organic growth through new equipment sales, they need to invest large amounts in R&D, prototyping, testing and marketing. This process is often drawn out and expensive and comes with high-risk. It is not always guaranteed that the successful development of a new product development, will be appreciated by the market.
To counteract declining new equipment sales, many OEMs are shifting to aftermarket sales with a focus on repairs, maintenance, spare parts and digital services. However, OEMs still face a challenge in retaining customers after warranties and initial contracts expire. Still, OEM customers are seeking to reduce spending, often outsourcing service and maintenance to third party providers. OEMs are losing market share to these more competitively priced third-party providers.
Aftermarket sales potential for revenue growth
As well as providing a stable revenue stream for OEMs, aftermarket sales often generate higher profit margins, with some studies showing a fourfold higher margin for aftermarket sales compared to equipment sales. But improving their aftermarket offering, OEMs can also strengthen client relations and increase chances of new equipment sales in the long-term.
Understanding customer base and product offering key to growing aftermarket sales
OEMs who increase their knowledge of their customer base can implement customer segmentation and drive sales force efficiencies in their aftermarket sales. Utilising customer data which shows the type of services provided, products being serviced, service contracts, revenue generated and availability of third-party alternatives, a tailored sales approach can be implemented. By segmenting customers based on propensity to buy, the OEM sales force can focus its efforts more efficiently.
In addition to adding value through customer insights, OEMs can explore ways to improve Aftermarket Lifetime Value (ALV). OEMs extensive product knowledge gives them a distinct advantage over third-party suppliers, and this should be leveraged where possible. The ALV is determined by three factors:
1. Average annual service revenue – the amount received by an OEM each year for each unit of equipment under a service contract
2. Lifetime – the percent of an OEM’s installed base that it serves during the product’s lifetime
3. Product lifetime – the period during which the equipment is in use. This could be longer or shorter than OEM specifications.
OEMs can increase ALV by developing new services and bundling service offerings which focus on extending service business beyond warranty periods. This could include a re-scope offering to overhaul and modernise customers’ existing equipment through hardware or software upgrades. OEMs can also investigate the possibility of re-pricing spare parts more dynamically. Finally, OEMs should develop or refine their go-to-market strategy for entering new markets or launching new service offerings in existing markets and segments.
Business Sweden supported Alfa Laval laying the foundation for growth of their service business
The Swedish OEM Alfa Laval is manufacturing and selling welded heat exchangers for the oil and gas and petrochemical industry (amongst others). As part of Alfa Laval’s global strategy, the company aims to grow the service business related to their global installed base. Alfa Laval needed a better understanding of customer demand and competitor landscape to develop a growth strategy aiming to maximise the growth potential. Business Sweden was engaged by Alfa Laval to give an independent view of the growth potential.
The analysis resulted in identified growth opportunities in terms of regional service centres to maximise customer reach, how to re-define service offerings, and add services to fulfil customer needs, as well as how Alfa Laval could position themselves and build on the strong market reputation that they already possess.
Growing aftermarket sales
Swedish OEMs often enjoy a good market reputation for providing reliable, sustainable and innovative equipment. However, Swedish OEMs are facing challenges retaining market share for the service of the equipment. The good market reputation provides a solid foundation for Swedish OEMs to grow aftermarket sales.
Contact our team if you want to learn more about growing your global aftermarket sales.