Healthy product margins? Service STILL matters

You might say there's a “perfect economic storm” brewing in aftermarket product service, fueled on the demand side by asset owner/operators requiring unprecedented levels of asset uptime, reliability, availability, and output; and on the supply side by manufacturers facing increasing commoditization and competition on the product side of their businesses.

But some niche manufacturers still enjoy sizable margins on their products and haven't felt as much as a passing breeze from this alleged "storm." Is aftermarket service irrelevant for them? Absolutely not! Here's why:

1. Spare parts: I was on the phone this week with a mid-size manufacturer from the U.S. mid-Atlantic seaboard that attributes 10% - 12% of its annual revenues to the sale of spare parts. With healthy margins on its complex industrial machines and little competition on the horizon, the company hasn't lost much sleep over its service performance. But the reality is, this company could more than double its annual parts revenues within 1 to 2 years, because it's currently losing ample market share to small enterprising machine shops knocking off their parts. The problem? This company still views service purely as a cost center, and has overlooked this opportunity to pad margins from the top-line.
   

2. Consumables: We've all analogized with Gillette's razor-blade strategy or Dell's printer-cartridge cash cow. The model is simple. You can sell your products at slim to no margin, as long as you can clean up on aftermarket consumables sales. But the model still sings with decent-margin products in pre-commodity markets. In the laboratory science space, for instance, it's common for every operation of a particular machine to require a series of consumables (e.g. reagents, catalysts, etc.). By keeping close tabs on consumable demand patterns, these manufacturers can ensure a steady stream of high-margin aftermarket revenues, to complement their already plump product margins.
   

3. Future-proofing: No margin is safe. Whether they're the forces of commoditization, competition, globalization, or obsolescence ... they will attack your product profit margins. And when they do, you'll fare a lot better if you've been parallel tracking with a 30%-margin+ service-driven revenue stream.