For most manufacturers, the parts department can be an important profit center as it is often a high-margin and high-growth area. Moreover, the parts business is a place to build and strengthen customer loyalty. For these reasons, there's a compelling case for prioritizing spare parts pricing over all the other areas of business opportunity in the service and aftermarket business unit.
Due to high margins and the potential for volume, OEMs that neglect their parts business leave money on the table. A well-run aftermarket parts business can also improve customer satisfaction and retention while requiring minimal effort and investment. It can also deliver recurring revenue that grows steadily over time.
While parts mean big business, many challenges accompany the opportunity for aftermarket parts. A recent survey by Microsoft of 20,000 people in 11 countries found that 48% of employees and 53% of managers are burned out. Growing the parts business makes sense for many manufacturers, however, adding more high-priority tasks to overwhelmed employees and managers will likely accomplish little.
With limited bandwidth available, how should you prioritize and support the aftermarket parts business? And is doing so worth the effort?
So, on average, how much do spare parts contribute to an OEM's revenue and profit?
According to studies, aftermarket services, which include aftermarket services, containing parts, can account for 20 to 40% of OEM revenues. A McKinsey study of 30 industries found that the average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services was 25%. For new equipment, the average EBIT margin was just 10%.
Since aftermarket parts can generate significant revenue and profits, are you doing all you can to capitalize on the opportunity?
If an OEM has thousands of parts listed in a print catalog, finding the correct part or material for their application can be cumbersome. Dedicated sales support helps customers find the right part, but small or medium-sized customers lack the dedicated support to make informed decisions.
Customers with a poor experience are more likely to shop for a new provider. There's much room for improvement and spare parts growth for many OEMs. But is the return on investment worth the effort? Let's consider the direct and indirect benefits of prioritizing investment in the aftermarket parts business.
What is the return on investment when the part department becomes a priority? OEMs that invest in their parts business generate a positive financial impact due to high margins and the ability to generate volume, partly due to demand for regional parts accompanying the push to reshare.
To underscore the potential for significant financial results, when we help OEMs conduct parts pricing analysis, we typically find that 73% of aftermarket parts could generate additional revenue if priced correctly using market-based pricing. Find out how with our Ultimate Guide to Market-Based Parts Pricing.
Aftermarket parts availability increases customer uptime, allows for more touchpoints, and enhances customer satisfaction. While it improves the buyer’s experience, it also creates cross-selling opportunities.
And the potential to improve revenue along with customer retention is significant. According to the PSbyM Process Industries Performance Study, 58% of plants incur machine replacement parts costs weekly, daily, or constantly. Yet machine uptime stood at just 67% at process plants included in their analysis.
OEMs that deliver spare parts quickly can decrease machine downtime and earn a steady revenue stream. Becoming a reliable supplier that can improve a plant's operations also builds loyalty, creates cross-selling opportunities, and reduces the likelihood of customer attrition.
Building and sustaining a profitable aftermarket parts business doesn't require an overly intensive and complex approach. High-performing tools are available to help overburdened employees and executives run the aftermarket parts program.
The aftermarket parts business typically involves limited touchpoints with other departments. The department can function independently without waiting for engineering, purchasing, sales, etc. Running an aftermarket parts business requires little training and cross-divisional support, and a small team can bring significant revenue.
Parts are not complex, and no new complicated tools, training, or processes are required. Simply put, you are already selling parts, but there are more efficient and profitable ways to serve the market.
Lastly, aftermarket parts offer a reliable and recurring stream of revenue that is largely crisis-resistant, grows steadily as the installed base increases, and favors OEMs as the preferred supplier for replacement parts.
Legacy machine service still happens even if new machine sales stagnate. Spare parts are always needed, and each new machine sales increase the lifetime value of a customer.
The case for growing your parts sales is compelling. The aftermarket parts segment is a high-margin and high-growth area of your business that can improve customer loyalty, decrease customer attrition, and is relatively easy to sustain.
By growing your spare parts sales, you can improve your financial performance while becoming a more reliable and trusted supplier to your customers.