How to Capture More Profits After the Sale

How to Capture More Profits After the Sale

If you’re the owner of a manufacturing company and haven’t heard the term “servitization” yet, you’re not alone. Our publication studies industry news every day, and the term only caught our attention a few weeks ago when new survey data was released that detailed how companies can increase their likelihood of profitability by as much as 24 percent through servitization.


What is servitization?

Most manufacturers are accustomed to the traditional model of the industry, that is producing and selling a product. For many, that’s the extent of their business model. Servitization is the expansion of manufacturing and product-focused companies into service contracts that take place long after the initial sale concludes.

The rise of so-called “smarter” equipment has led to a major increase in servitization. New internet-enabled technologies that allow firms to monitor their equipment remotely has enabled manufacturers to develop service packages for their clients based on condition and maintenance needs. This has been a great way for manufacturers to keep revenue streams open during a time when new product development has slowed.

“OEMs may find untapped goldmines in aftermarket services by strengthening their core business in parts, repair, and maintenance,” according to analysts with McKinsey & Company, a global management and consulting firm based in New York. (Ambadipudi, et. al)

“The appeal of this strategy is simple: services provide stable revenue—and often higher margins—than sales of new equipment. One analysis across 30 industries showed that average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services was 25 percent, compared to 10 percent for new equipment,” McKinsey analysts noted.


How Many Manufacturers are Adopting this Trend?

New survey data published earlier this summer contained a breakdown of the manufacturing industry’s implementation of servitization. IFS, a firm domestically headquartered in Illinois that develops software for clients around the world, surveyed over 200 manufacturing executives to learn more about how they’re making use of the trend.

Among its key findings, the IFS survey found that companies offering annual aftermarket service contracts are 24 percent more likely to report profitability than those doing reactive field service work.

A large portion of manufacturers have yet to make the shift into additional service offerings, but many are beginning to develop broader offerings. Among its results, the survey found:

  • 38 percent of respondents sold only products, with no aftermarket or other service revenues.
  • 19 percent sold products and some aftermarket service parts.
  • 15 percent sold products and aftermarket field service through break-fix repair.
  • 16 percent sold planned maintenance contracts with service level agreements (SLAs).
  • Only 4 percent of respondents reported full servitization – selling products on a subscription rather than a discrete item through power-by-the-hour, fee-for-usage, or revenue sharing agreements.

Companies operating in the fully-servitized business model include:

  • 22 percent of medical device manufacturers
  • 5 percent of metal fabrication businesses
  • 5 percent of companies in the oil and gas industry


Signs of Growth Coming

Experts are predicting that the new model of servitization is only going to grow for modern manufacturers, perhaps even becoming just as important as the production side of their operations. For example, Frost & Sullivan, a global research and consulting organization based in California, predicts that “revenues for the calibration and repair services market are expected to reach $3.98 billion by 2022” around the globe, particularly as new technology becomes more widely used.

The rise in smarter factory methods is definitely going to be a major driver of the servitization movement. The “internet of things” (IoT), where equipment and materials become increasingly connected to the internet, is a central component of this model. Perhaps not surprisingly, both servitization and IoT usage are inexorably linked and are expected to rise alongside one another.

“The fully servitized model, where a manufacturer may deliver a piece of equipment as a service, charging based on usage or through revenue sharing with their customer, requires a high degree of technological sophistication,” IFS Senior, North America, Tom DeVroy said.

Given that the “high degree of technological sophistication” is widely expected to see greater use over the next decade, in part due to the fact that it will be boosting company productivity by over 30% (Capgemini) it’s safe to assume more manufacturers will be offering lines of service alongside their products. Even those companies who will be slow to adopt the new service model have a lot to gain from connecting their products to the digital world, if only for better reporting and monitoring.

“Even companies selling annual maintenance contracts or break-fix repair can benefit from integrating IoT data streams with their field service management software to improve responsiveness, automate the dispatch of technicians based on conditions of the product or just to gain an understanding of how their customer is using their products so they can sell to them more effectively,” DeVroy said.

One thing’s for sure no matter how you look at it, there is a whole lot of opportunity headed this way for manufacturers. Not only will technology be giving them greater insight into how their products function and are used by customers, they may very well have an entire new service attribute to their industry.

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