Introduction
After writing over 90 posts about service revenue and customer retention, it is time to show why these subjects matter. I will tell this story using publicly available data of service revenue as a percent of sales for the company. This data is from a collection of high-tech companies and demonstrates the importance of the services revenue contribution to the company’s overall performance. Also, I will briefly discuss other information I found while reading many Annual Reports that may help you understand your company’s results.
We recently published an updated version of this article will all new data: Service Revenue as a Percent of Total Sales (2022). Some of the data and ideas in this post are still relevant.
2013 Analytical Product Companies Results
For this section, I selected some of the largest companies in this segment, as well as a few others that are very familiar to me:
Bruker has been growing through acquisition and is in the phase where it is integrating the new businesses into the Bruker system. ThermoFisher has an extensive business selling commodities and consumables that do not require service, which helps explain the low percentage of service revenue. So, depending on your product mix, if you are in this industry and your service revenue as a percent of sales is not at least 15%, you are not delivering up to your full potential. And if you are producing at least 15%, set your sights higher because 30% is achievable.
2013 Miscellaneous High-Tech Industries
I selected a few companies in the high-tech space that are in “interesting” industries. This list is not representative of the high-tech sector but does illustrate the range of results that are being achieved today:
Xerox has worked to transition from a copier manufacturer to a full-service document management business for at least ten years. I believe they have succeeded!
Applied Materials is attractive because its products are so expensive that its services organization has to be very creative to contribute such a large percentage of revenue. They refurbish and resell older generations of products taken as trade-ins for new equipment sales. They also offer extensive installation and upgrade services, plus others that generate beautiful results.
The Oracle Story Is Special and demonstrates the power of service margins:
Look at these numbers; License updates (after the initial sale) and product support combined generate an 88% margin. That is minting money! And overall, they contributed 74% of the corporate margin. While you cannot quickly achieve these results, if you support tangible products, you can expect to generate a 50% margin (depending on how warranties and installations are handled in your accounting system).
What About Geographic Influences?
The FEI Annual Report breaks out Product and Service revenue by major geographic areas:
This data resonates with me. European companies generally fall somewhere in-between North America and AsiaPac. In my experience, Asia Pacific organizations are reluctant to purchase service contracts unless they are a subsidiary of an American business (then they follow the parent company’s model). And may not follow the American parent model if it conflicts with their culture.
A Final Story
I know a U.S. subsidiary of an international company that manufactures industrial controls sold to OEMs who incorporate the controls into products sold in various industries. This company provides end-user tech support and field service if the end-user contacts them. Even though the control manufacturer generates service revenue from their customer’s customers and only knows about these people when they call for support, their service business contributes a little more than 15% of the business’s total revenue. This is quite an achievement and shows what making service revenue an essential element of the entire revenue picture can do.
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 increase service revenue as a percentage of sales, please contact us or check out some of our free articles and white papers here.