Drive Services Revenue at the Point of Your Initial Equipment Sale

If yours is like many other industrial equipment manufacturing organizations, your aftermarket service provisions represent an under-utilized gold mine, filled with unrealized potential to generate revenue possibly exceeding those yielded by primary-product sales. This is according to Deloitte research which uncovered that aftermarket service sales can easily equal or exceed the profit made from an original equipment sale. Analysts estimate that the average operating margin from aftermarket revenue is about 2.5 times the operating margin from new equipment sales.

Make More from Equipment Sold

At a time when revenue from new product sales has been declining, who wouldn’t want to generate additional revenue on a product long after it has been sold? Driving up services revenue at the point of the initial equipment sale can offset the pressures on original equipment margins because service revenue is typically less impacted by market disruptions. Service revenue streams include things like additional supplies, pay-for-play services, and maintenance programs. These revenue streams often represent a large opportunity that few manufacturing companies fully exploit. But times are changing, and market leaders make more by bundling it all together as part of a broader initial deal.

Increase Customer Lifetime Value

The power of this approach is that it not only extends the revenue potential of the initial sale, it also extends the value of each customer relationship. Over time, services build trust, win-win relationships, and total customer value, while manufacturers find stable cash flows during periods when equipment sales are slow. The revenue opportunity is huge. For example, American businesses spend approximately $1 trillion every year on assets they already own. As a result, establishing and growing an aftermarket services business is becoming an imperative for manufacturers worldwide.

Best Practices to Drive Service Revenue

How can you do it too? Here are some best practices to consider.

• Leverage your customer data: Bundled and aftermarket services revenue may be a gold mine of opportunity, but you’ve got to know where to dig. Your best tool is your existing customer data. The probability of selling to an existing customer is 60 -70% compared to a 5 -20% chance of selling to a new prospect. You likely have a great deal of information already on hand about your clients and customers; company background, buying history, market competitors, and so forth. And new data is being added every day. With new data analysis tools, you can begin to gain competitive value out of the information. Who is in your current install base? Which customers are most likely to buy? What products are best suited to a bundled service deal? Customer data gives you the capability to really ‘know your customer’ and arm sales teams with the business intelligence needed to sell more with less effort.
  
  
• Bundle equipment and services at the time of sale: Bundling has long been shown to be an effective and profitable marketing strategy, but now it has taken on increased importance for manufacturers looking to complement their products and satisfy a broader array of customer needs. One approach is often called pure bundling, where a group of services are only available as a bundle with the original equipment sale and aren't sold separately. Another is mixed bundling, where services are sold both as bundles and as individual units. Bundling usually saves the consumer from 7% - 15% over the cost of purchasing the services separately. Bundled sales can boost aftermarket services revenue by 30% to 60% for manufacturers.
  
  
• Leverage service levels: Another tactic to drive revenue at the point of your initial equipment sale is to offer customers different levels of service. A common approach is to offer gold, silver, or bronze levels of service, with gold service incurring the highest charge for the most inclusive service. Often, customers that enter at the lowest, or bronze level, are then likely candidates for more advanced silver and gold levels of service. It is important from the outset, however, to make a clear distinction between service levels by providing options such as faster response times, service on the customer’s site, or 24-hour support.

Moving Forward

How can you drive service revenue with a similar approach at the point of your initial equipment sale? One way is by using XaitCPQ, a cloud-based software that helps organizations construct and close more profitable bundled deals. The best-of-breed configure-price-quote system captures all of your complex product and service pricing information and models in one place. From there, it makes it easy for sales teams to quickly and correctly present any combination of equipment and service offerings, and to do so at scale. The capabilities built into XaitCPQ are especially powerful for large manufacturers with multiple product offerings, multiple service options and programs, and multiple countries involved.

Related article: How to gain a profit advantage with guided selling of Aftermarket Services?