Many manufacturers of capital goods have professionalized their service business and realized that the majority of profit is generated through equipment lifecycle. With about 25% of total revenues and partly more than 50% of the company profit, after-sales business is a key factor for corporate success in the capital goods industry.
Most major OEMs in the U.S. who generate a significant part of their business abroad find their international businesses currently challenged by the strength of the US Dollar. A well-designed after-sales strategy could help those companies smoothen or even neutralize the impact on profit.
Relevance for Corporate Success
Excellent after-sales service is a strategic success factor for capital goods manufacturers. In total, there are five kinds of potential to tap into:
Sooner or later, competitors can copy technical characteristics as American companies have painfully experienced from their international rivals during the last decade. Consequently, products are becoming more substitutable, creating price pressure and less customer loyalty. On the other hand, customer-oriented services have proved to be much harder to imitate, therefore allowing companies to substantially distinguish themselves from competition.
Earnings and Market Potential
During the complete machine lifecycle, a variety of service offers provide possibilities for further increases in earnings – especially for capital goods running for 20 years or more. In many cases, it is the enhanced after-sales contribution margin (e.g. for spare parts) which is generating positive bottom line results for the entire company.
Customer Loyalty Potential
During the operating life of capital goods, after-sales service creates numerous critical touch points for customer interaction. Many contact points within after-sales, the so-called “Moments of Truth,” are particularly decisive for customer satisfaction and loyalty.
Resale, Acquisition of New Customers and Image Potential
Resale only works when companies win over customers with excellent service during the usage phase. Only satisfied customers will buy from the same manufacturer again. Moreover, these customers serve as cost-free brand ambassadors generating new and additional sales in the most efficient way.
Service is an important source for collecting information. When service is properly provided, manufacturers can gather information on machine performance, customer needs, or investment projects. This knowledge is hardly accessible for competitors, and capital goods manufacturers can use it for product development or market cultivation.
What are the critical service dimensions for “Service Excellence?”
The potential benefits displayed in the graph below should be the main focus when striving for “Service Excellence.”
For this purpose, companies need to improve under the following dimensions:
Service strategy is not just derived from corporate strategy, but rather an integral component of it. Any corporate strategy without services must be evaluated as incomplete. This clearly reflects that service strategy development is a top management task. It must at least define the business model, long-term business targets and go-to-market approach.
Over time, many companies have created a broad range of services. However, in that process, too many have neglected the fact that some services are not profitable, or simply not required by the customer.
A variety of instruments could be applied to service portfolio assessments. For example, a general customer satisfaction study could be used to survey customers’ satisfaction and expectations regarding after-sales services.
Market-oriented services development can be successful when it is conducted as systematically as new product development. Many companies are increasingly using the so-called “Service Engineering”, which utilizes appropriate methods and software tools for a systematic services development.
Professional pricing in after-sales service represents a key earning leverage, especially when focusing on the spare parts pricing. Excellent spare-parts pricing works in a value-oriented manner, in which a set of criteria and a scoring model is used to evaluate the parts portfolio. Resulting scores will then be used to set differentiated price mark-ups. Our project experience shows that the pricing of machine repairs, field service and service contracts also provides a high potential for improvements. For example, repair prices are not sufficiently differentiated (e.g. express and regular repairs); therefore, the customers’ willingness to pay cannot be completely exhausted.
Service Organization and Processes
In recent years, many manufacturers of capital goods have created independent service departments or even established dedicated service companies. However, they must question themselves whether it is more advantageous to have an independent service organization, or to set up integrated organization models. Some companies are heading towards reintegration, thus sales and service are growing together again.
Excellent design of service processes is even more important for achieving excellence in after-sales. Service processes are excellent when they are fast, stable and cost-efficient. This can only be reached through consistent orientation towards customer requirements, maximum reduction of unnecessary interfaces and optimal system support.
Service Controlling and Key Figures
Service business excellence can only be reached with the highest possible transparency in relevant key figures, which can be structured into four categories:
- Business Success (Revenue, Hit Rates, etc.)
- Processes (Processing Time, Availabilities, etc.)
- Customer (Customer Satisfaction, etc.)
- Employees (Occupancy, etc.)
Ideally, key figures should be made available and reported to management on a weekly or monthly basis.
Successful after-sales service is an element of stability and a potential growth driver, especially during times of economic uncertainty. Therefore, the five ‘Service Excellence’ dimensions – Service Strategy, Service Portfolio, Service Pricing, Service Organization and Processes, Service Controlling and Key Figures – must be optimized. Due to its strategic relevance, this topic requires top management attention within the capital goods industry.
About Homburg & Partner
Homburg & Partner is an internationally operating management consultancy with over 200 worldwide clients and offices in Mannheim, Munich, Dusseldorf, Boston, Zurich, and Warsaw. Founded in 1997, it was named ‘Best Consultancy’ for Marketing and Sales in 2009 and 2012. For more information, visit http://www.homburg-partner.com.
About the Authors
Markus Pfeifer leads a competence center in the branch cluster Industrial Goods & Machinery as Partner for Homburg & Partner. Since 2005, he has led many national and international projects for manufacturing, including component manufacturers, mechanical engineers, and system integrators. Among his long-standing customers are international affiliated groups from DAX and MDAX, as well as traditional medium-size companies.
Daniel Antolin is a principal at Homburg & Partner, within the branch cluster of Industrial Goods & Machinery, Consumer Durables, and is also the head of business development for the firm’s U.S. presence. Prior to joining H&P, Antolin worked for Siemens (Spain).