The Four Aftermarket KPIs Every OEM Leader Should Track

Service gross profit as a percent of the total gross profit

For this set of 27 data points, the first place to look for insight is the service gross profit as a percent of the total gross profit statistic. This is because we are all working to maximize our profit, and, in most businesses, our only levers are profit from products and services. This is where the service level stands out. Our data shows that service businesses contribute an average of 37% of the total profit for this group of companies. This is important since most companies are closer to maximizing their product revenue than service revenue. Yet, they continue to invest in product development or acquisitions to broaden their product lines, but the real untapped upside will come from services.

I cannot recommend a good profit contribution target because each business differs. Let’s look at a few situations where the companies are in the same industry.

Cactus, Baker Hughes, and Schlumberger all focus on supporting the oil-producing industry. Yet Cactus Service contributes 16% of total revenue, Baker Hughes Service contributes 39%, and Schlumberger Service contributes 68%. The difference is not the industry but each company’s business decisions – Cactus sells many products while the other two offer broad services.

We also have three companies on the list that sell into the building industry. Carrier and Trane are in the air handling industry, and Otis is in elevators. Trane exceeds Carrier in each of the three metrics. Trane and Carrier each generate the same product margins, but Trane generates higher service margins and contributes a more significant service revenue than Carrier. Otis’s service business is knocking it out of the park when it comes to contributing large amounts of revenue (59%) to the top line. The difference is, again, the decisions the businesses made in the past and how well they are each executing.

The final comparison is between Caterpillar and Epiroc, which are not in this data set. Cat service is the responsibility of their independent dealer network. The services Cat provides (spare parts and remanufacturing are two) are not material compared to product sales and are not publicly reported. On the other hand, Epiroc reports that it performs 80% of the service to its products using direct employees: service contributes 59% of its total revenue. And that excludes attachments and tools. Both companies are successful in their business segments but use a service strategy opposite each other.

Service revenue as a percent of total revenue

The second place to look for insight is the service revenue as a percent of total revenue data. In the data we previously looked at, the average for this data KPI is 27%, meaning that in half of the listed companies, service contributes up to 27% of total revenue (from 9% to 27%). The other half contributes more than 27% (from 28% to 68%).

This data set has been extracted from a more extensive set that includes companies that do not break out product and service data. I have been collecting the larger data set for three years; I add companies that come to my attention each year. Here is the three-year summary data:

In a 2021 article, Accenture said, “…approximately 29% of industrial company revenue, on average, is currently generated by services.”

I recommend using 30% service revenue as a percent of total revenue for most businesses as an excellent target to benchmark your business against many other companies. The 27% number in the table in this article is valid, but 30% is a more global value.

Here is an exciting example of how the percent of revenue aftermarket KPI can provide valuable insight into a company’s long-term business strategy. Consider Thermo Fischer Scientific, an American supplier of analytical instruments, life sciences solutions, specialty diagnostics, laboratory, pharmaceutical, and biotechnology services, with 2023 sales of $42.857 billion. Their revenue breakdown is 40% from services, 40% from consumables, and 20% from products. And they keep growing by acquiring companies that support their three revenue streams.

Service and product margins

The following chart takes the data from the previous chart and graphically compares service and product margins. This data indicates that service sales generate a 36% margin, which compares favorably to a 31% product margin. This is a big deal since we frequently see statements in articles and blogs that service margins are higher than product margins. But they are rarely quantified. Here, we can confidently say that average service margins are about 5% higher than product margins.

Next, let’s look at the service margin data. I have been told that service margins have been around 30% for years, and this data shows that the average is 36%. However, in detail, we find that Lockheed-Martin has the lowest service margin at 11%, and Keysight Technologies has the highest at 66%. For those unfamiliar with Keysight, they manufacture electronics test and measurement equipment and software and had a 2023 revenue of $5.46b.

The product margin data has two interesting (out-of-range) data points. GE Aerospace and GE Vernova had negative product margins, but both had 40% and 35% service margins, respectively. Recently, The Motley Fool wrote about aircraft engine pricing:” The aircraft engine business model involves initially selling engines at a loss, followed by decades of lucrative aftermarket revenue, mainly through customized service agreements (CSAs).” No doubt, the same is true for sizeable power-generating equipment. In another article, The Motley Fool went into great detail about GE Aerospace sales.

Execution is the key to growth.

According to Michael Porter, a Harvard Business School Professor known for his theories, books, and articles on economics, business strategy, and social causes:

“A distinctive value proposition is essential for strategy. But the strategy is more than marketing. If your value proposition doesn’t require a specifically tailored value chain to deliver it, it will have no strategic relevance.”

For industrial products, the value chain starts with product creation (marketing, engineering, and manufacturing), then selling, aftermarket support, and the customer. As the OEM, you define, coach, and monitor product creation. However, when it comes to selling and aftermarket, the OEM’s control and influence can be solid if the sales and support teams are all part of their organization. On the other hand, it can range from solid to soft if the sales and support team(s) are independent of the OEM.

There are three types of sales and service structures:

1. All direct employees
2. All non-employees
3. Hybrid, with some locations direct and others independent.

• Industrial products generally fall within two categories: fixed and mobile. Mechanics cannot travel to a business and economically service NC machines, process and packaging equipment, and anything attached to a structure in a repair center. Conversely, customers can usually take or send mobile equipment to a dedicated repair facility for service. Of course, there are some exceptions, but whether the kit comes to the service center or the service technician goes to the equipment significantly impacts how you design your aftermarket organization.
• The other wrinkle in the analysis is whether the service technician must be associated with the OEM or whether an employee of the equipment owner or an independent service technician can do the job. And, if the repair does not have to be performed by the OEM’s organization, should the repairing technician be factory-trained and certified, or can the OEM provide enough online tools backed up with in-house remote technical support?
• Now, let’s consider the exceptions. Let’s assume you manufacture fire trucks. Your customers may have a central vehicle maintenance garage where the trucks go for repairs. However, if a fire damages a truck, the repair technician may have to go to the truck’s location, or the truck may have to be towed or trucked to a full-service depot.
• If you manufacture hospital bedside monitors and the product fails while not attached to a patient, somebody can take the monitor to the hospital’s central repair facility and replace it with a backup unit. However, if the monitor is connected to a patient in an operating room, the biomed technician can go to the equipment and make the corrections to a spare unit.

There is no one-size-fits-all answer to the organization design question. However, if you still need to review your organization, this is a good time for fresh eyes to help make the analysis. When performing the review, consider how your current team members and your operating methodologies help you achieve these fundamental objectives:

• Treat all your prospects and customers the same. The only exception is when it comes to local culture.
• Do not do something in Country A that will prevent a sale or resale in other countries.
• Share all non-proprietary information with all sales and service team members.
• Create an environment where all business-related issues, including customer satisfaction and loyalty, new product design and development inputs, and competitor insights, can be freely shared.
• Dealers worldwide must communicate freely and openly. Complete cooperation must be achieved on global deals, and the OEM is included when there are unique product changes or financial considerations that the OEM must support.

Value-added resellers (VARs) and System Integrators (SIs) differ from Agents and Distributors. VARs and SIs do not get up each morning and go to work with a plan to sell your products or parts and services. Their daily mission is to make a sale that solves a customer’s problems and earns them as much as possible. Sometimes, your product or service plays an essential role in them getting the order; sometimes, they sell a competitor’s products, and sometimes, what you have on offer is separate from their solution. Their unique business needs must be considered outside your dealer or distributor network. Also, remember that VARs and SIs probably work with your dealers and distributors, and you may not even be included.

If your distribution network is structured correctly, your agents and distributors will only carry your products in the category where you sell. Suppose you sell fire engines; your agents and distributor will only have your products but may offer several different vendors’ ambulances if they do not compete with your firm. Suppose you do not supply a wildland fire engine but offer the best aerial and conventional fire engines. Your distributor or agent may offer both companies products but should not support a product overlap. If this situation frequently occurs, you may have stumbled into an excellent merger scenario or an opportunity to form a fire engine joint venture.

Assessing and redesigning your distribution and support network is likely to be painful. You may have to make decisions that financially affect people who have worked with you for decades. The best way to perform the assessment and develop structural alternatives is to work with an experienced and impartial consultant who always has your best interest in mind. To explore the following steps, contact Sam Klaidman.

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: Photo by Stephen Dawson on Unsplash