I have written several articles about the aftermarket’s role in OEMs’ go-to-market strategies. However, I have yet to give you a financial reason to invest your time, effort, and money into making your aftermarket program a strategic necessity.
Understanding the strategic importance of aftermarket programs and how they can significantly impact your business is crucial; it’s a matter of survival in today’s competitive market.
Data collected from public companies
Now that most U.S.-based public companies have filed their SEC Form 10-K, their annual filing, I have looked at over 100 of them and collected valuable data from 28. The two most important pieces of data are:
- The percent of company revenue contributed by service (the aftermarket)
- The percent of company profit contributed by service
By internalizing this data, you will undoubtedly be motivated to invest in the aftermarket—either at your current rate or at a higher rate.
The following chart shows both sets of data:
The data was sorted by service profit as a percentage of total profit. The two high-level statistics are:
| 2023 Service Revenue as % of Total Revenue | 2023 Service Revenue as % of Total Profit | |
| Average | 27% | 38% |
What These Graphs Say
The key lesson is that, on average, a B2B OEM gets about a quarter of its revenue and a third of its gross profit from its aftermarket business. Aftermarket sales generate a higher gross profit margin than product sales. This fact alone should be reason enough for OEMs and dealers to invest in the aftermarket.
Interestingly, GE Aerospace and Vernova lose a little money on their product sales but make up for it in post-sales services. Of course, they would be much better off if they made positive margins on all sales, but that is for another article.
A recent Entytle article written by Lalit Mohan Chandra Bhatt started with this paragraph:
“A study by AMR Research (1999) found that businesses earn 45% of gross profits from the aftermarket, even though it accounts for only 24% of revenues. While the study is dated, the basic premise still holds. Despite such potentially high margins, many OEMs don’t dedicate the necessary attention to this area.”
Thus, over 25 years, the total percent of revenue contributed by the aftermarket stayed about the same, but the gross profit contribution declined by about 8%. The increase is probably due to outsourcing, off-shoring, the supply chain, and tariffs partially offset by slower wage growth and automation.
Growing Aftermarket or Product Sales
If your current efforts to grow aftermarket sales are less than your efforts to grow product sales, consider the possibility of higher margin sales to current customers. You want to nurture these people and create loyal customers who will not look at your competition when they want to purchase another of your products.
Growing the aftermarket is especially important if your company is PE-owned. PEs have two needs different from businesses controlled by investors or the owner/operator. The needs are:
- The business must grow and, therefore, is looking to increase margins.
- The PEs want a recurring revenue stream.
Aftermarket growth addresses both concerns.
Related articles:
- Now Is the Time for a B2B Industrial Company to Focus on the Aftermarket
- How to Grow Spare Parts Sales for Aftermarket Revenue and Profit
- The Four Aftermarket KPIs Every OEM Leader Should Track
About Middlesex Consulting
Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their service revenue and profitability by applying the methodologies and techniques associated with Customer Value Creation, Customer Experience, and Market Research to assist them in designing and commercializing new services and the associated business transformations. Contact Sam here.
Image credit: Image by Sally Jermain from Pixabay