Blog, Pricing

How to Gain Profit Stability by Investing in Your Aftermarket Business

By Kalle Aerikkala
November 13, 2020

A healthy aftermarket service business offers commercial stability in periods of high market volatility. This has played out time and again, including in the current COVID-19 pandemic environment, with companies who maintain the highest share of aftermarket service business able to retain the highest profitability (see below chart). The economic impact on those companies is consistently lower when compared to their industry peers that have smaller aftermarket business.

(2020 study of seven European industrial manufacturers’ average EBIT % over last two years.)

As the frequency of major disruptions continues to increase, from trade disputes, impact of climate and political instability, the need to find drivers of business and profit stability becomes increasingly important. Companies need to continuously invest in the aftermarket service business to ensure a more stable and recurring stream of profit. Dedicated investment in the aftermarket service business is needed to give it a chance to grow however, rather than considering aftermarket an afterthought.

While many elements in the aftermarket service business are going through dramatic changes right now, such as new IoT enabled subscriptions and lines of support, there are other areas that must remain stable for it to deliver success. It is appropriate to understand the cornerstones for continuity and link current business models. Examples include:

  1. The need for value creation for multiple user groups of industrial equipment.
  2. Diverse commercial strategies within industrial equipment users requiring a differentiated service portfolio.
  3. Equipment will still need maintenance delivered through an onsite presence.

Business Model Innovation

There is a growing need to develop new ways of working and looking at the aftermarket service business and this requires innovation. But first, what defines a business model?

Clay Christensen suggested that a business model should consist of four elements: a customer value proposition, a profit formula, key resources, and key processes. Let’s use his definition to examine the aftermarket service business.

Customer Value Proposition

The Customer Value Proposition is at the heart of every business model. The key question is what customer problems am I solving? For traditional aftermarket services the answer to this question has been clear, with services offered to keep or restore equipment to an operational state. The overall customer value proposition is however more complex. In aftermarket services it also includes the availability of the physical good or service as both are needed at short notice by customers. The level and availability of expertise and the way customer relationships are handled are both important factors in the value proposition.

Profit Formula

The business model profit formula includes:

  • Revenue Model – Price X Volume
  • Cost Structure – Variable and Fixed Costs

Out of all the factors, price is by far the most influential. Set too high, volumes will not materialize. Set too low, assuming a consistent cost structure, then profit will not be achieved. There are numerous techniques available to aid in the process of setting the right price. The most important consideration is simply the alignment to customer perceived value.

Key Resources

Key resources are defined in the literature as the most important resources, whether organizational, buildings, technology or other that ensures that the customer value proposition gets delivered. In aftermarket services key resources in the traditional sense would be the assets securing support availability such as stocks and pools of highly skilled support personnel. Focus needs to shift from not only the availability of highly skilled technical resources to a platform for operation support and the development of partners to scale the business.

Key Processes

Breaking down organisational silos as a common way of working will be the winning concept for the future. Businesses need to focus on delivering value to the customer and setting the right metrics. They will need to focus on process development to:

  • Improve remote support capabilities
  • Improve purchasing and logistics
  • Pricing

Investment in the aftermarket needs to focus on both the organization and technology and aim to drive innovation in business models as a way to achieve competitive differentiation. When advancing through maturity stages of the aftermarket service business, it is important to periodically consider what parts of the business model need to be adapted in order to create long term sustainable competitive advantage. An important aspect in considering what to adapt is in fact to look at what elements need to be removed.

To learn more about investing in the aftermarket business at your organization, download our whitepaper The Future of the Aftermarket Organization and Why You Have to Invest in It.

  • aftermarket , customer value proposition , pricing , profit formula , profitability

    Kalle Aerikkala

    Kalle Aerikkala has worked within the pricing and product management profession for the last 10 years, starting with Finnish technology companies supporting service and spare part pricing globally. Currently Kalle works with Vendavo as a Business Consultant, helping a broad range of customers to achieve better results through improved commercial excellence. Even after 10 years in the industry he learns something new every day, and finds the world of pricing incredibly interesting as it touches on basically every function within a company.