A high-level B2B OEM Growth Strategy
When aiming to grow a business, there are only four paths to follow when crafting an OEM growth strategy.:
- More current products to current customers
- New products to current customers
- Current products to new customers
- New products to new customers
For B2B component- and assembly-level manufacturers, the focus is generally on selling more of their current offerings to current and new customers. However, B2B OEMs can tap into all four options, and the “new stuff” can and should include new or enhanced services.
Why End-User Customers Buy Products and Services
Before exploring a B2B OEM growth strategy, it is essential to establish why your customers purchase your offerings in the first place. These businesses must use your product to achieve one or more of their desired business objectives. For most companies, these objectives include growing revenue, reducing costs, mitigating risks, and retaining key employees.
However, customers cannot achieve these outcomes if your equipment is not running at the level they expected when the order was placed.
Here is a quote from a Syncron research report: “With 98% of customers demanding maximized product uptime, but only 33% of manufacturers equipped to offer it today, there is a clear gap between expectations and reality.”
The same report included a graph with participants’ responses to the following question: “Do you currently feel pressure from the executive suite to build an after-sales service strategy that maximizes product uptime, moving away from a transactional, break-fix model?”
- 12% chose “Yes, this is a critical priority, and we have a strategy in place.”
- 54% chose “Yes, this is a critical priority in the future.”
- 28% chose “Somewhat, this one of the strategies considered.”
- 2% chose “No, this is not a priority.”
The good news is that customers expect to pay suppliers to get high-quality and fast service. Since these customers have kept their capital equipment for many years, they are prepared to pay significantly. In fact, over the lifetime of a piece of capital equipment being serviced under a contract from an OEM, the total service revenue is frequently more than two times the original purchase price. The margin is generally higher for the service than for the product.
Below are four examples of how Fortune 500 companies benefit from their aftermarket service business.
1. Milacron Holdings Corp.
From the 2017 Milacron Holdings Corp.10-K filing:
Key Drivers of Our Businesses
“Our strategy is designed to maximize revenue from consumable products across the life of a machine, while offering plastic technology solutions to a broad customer base. Management estimates that the value of available consumables revenue across the life of a machine is one to four times the cost of a machine. This strategy is shifting our revenue and earnings model to be more heavily weighted towards consumables.
The consumables portion of our APPT and MDCS segments consists of: (1) machine aftermarket parts and service which are required annually, (2) hot runner systems and mold bases which are required each time new plastic parts are designed and existing plastic parts are redesigned and (3) upgrades and overhauls which occur as customers decide to improve the performance or extend the life of their machines.
Upon a customer’s decision to replace a machine, we can repurchase the existing machine and sell it as a certified pre-owned machine. All of our sales in our Fluids segment are considered to be consumable and, when combined with our APPT and MDCS consumable product lines, consumables accounted for 64% and 63% of our sales for the years ended December 31, 2017 and 2016, respectively. We believe this percentage will increase as we capture more of our customers’ spend on consumable products through our lifecycle sales approach.”
2. Boeing
- Total revenue (2017) — $93.4 billion
- Global Services revenue — $14.6 billion or 15.6%
In addition, in October 2018, Boeing closed a $4.25 billion acquisition of parts distributor KLX Inc. Boeing expects further purchases to help in tripling revenue from the company’s year-old Global Services division to $50 billion in a decade, said the unit’s chief executive Stan Deal in a Reuters interview.
3. Textron Aviation
In 2017, Textron Aviation reported revenue as follows:
- Aircraft sales — $3.1 billion
- Aftermarket services — $1.6 billion or 34% of total revenue
In 2016, aftermarket services generated 31% of total revenue, so YOY growth was significant.
Additional Benefits of a Strong Aftermarket Service Business
In addition to creating shareholder value, a company with aftermarket service as part of their OEM growth strategy offers other benefits. A few key advantages are listed below.
- Additional sales to new customers — Remember that business customers need high uptime. If you can demonstrate that you provide better service than your competitors, you will be in a strong position to win new customers.
- Additional sales to existing customers—The same idea here: If a customer thinks about changing suppliers because they believe all the competitors’ products are equal and another company has better service, improving your capabilities will probably lock in these existing customers.
- Improved loyalty — A delighted customer is likelier to recommend you to their friends and associates. This is like getting paid to share your story with prospects.
- Better feedback about customer wants and needs to drive internal innovation — Customers like to share information and problems with companies that help them achieve their business and personal objectives.
- As the world moves toward the Industrial Internet of Things (IIoT), the prerequisite is a great field service organization that keeps customers’ equipment running with minimal downtime. The IIoT then incrementally improves uptime, and many customers are or will be willing to pay for the improvements.
“An outstanding product is no longer a significant competitive differentiator. Today’s customers expect ‘just-in-time’ service, where repairs, maintenance, and updates are performed before it ever becomes an issue for the customer.”
— Carsten Knudsen, global head of Supply Chain Business Improvement, Siemens Gamesa Renewable Energy
High-Level Action Plans
If you provide outstanding services, generate customer loyalty, and create above-average shareholder value, continue doing what you do, only faster and better.
If you do an outstanding job with basic remedial services like installations, parts, and field service, consider upgrading your services to maximize customer uptime. This may require additional resources and new processes, but these investments will be important steps toward creating high shareholder value.
If you provide the absolute minimum of service, which barely keeps you in the competitive game, you must immediately create a new OEM growth strategy. Otherwise, you will quickly see a downturn in new and repeat product orders.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization grow your field service business, please contact us or check out some of our free articles and white papers here.