The Idea in Brief
In many industries—automotive, consumer electronics, home appliances—the after-sales service market has ballooned to four to five times the size of the original equipment business. And the aftermarket is a high-margin cash cow: in 2001 alone, GM earned more money from $9 billion of after-sales revenues than it did from $150 billion of income from vehicle sales.
Despite these juicy numbers, most organizations squander the aftermarket’s potential. Why? After-sales support is notoriously difficult to manage, compared to manufacture of products. For example, it’s hard to deliver technical support efficiently because demands for repairs don’t adhere to planned schedules. And only those companies that manage the aftermarket skillfully make money from it.
How to extract profits from the aftermarket? As Cohen, Agrawal, and Agrawal recommend, treat your service promises not as costs of doing business but as revenue-generating products that you design, price, produce, and deliver to customers. Design a portfolio of service products that meets different customers’ needs, some for speed, some for economy. And create a distinctive post-sales supply chain—one that delivers the people (technicians, call-center staff), parts, and infrastructure (information systems, transportation) needed to provide stellar service.
Matching rivals in product performance and price only gets you into the game. Your aftermarket prowess wins you the game—in the form of soaring profits and stock price, and enduring customer loyalty.
The Idea in Practice
To win in the aftermarket, Cohen, Agrawal, and Agrawal recommend these steps:
Choose Which Products You’ll Support
Will you service some or all of the products you make? Will you service complementary and competing products as well as your own? Consider servicing products you don’t manufacture only if 1) similar assets and skills are required, 2) customers really want one-stop servicing, and 3) doing so doesn’t risk diluting your brand.
Design Your Products Portfolio
Create a variety of service products that meet customers’ needs and willingness to pay. Offer products ranging from fast and expensive (“platinum services”) to slow and economical (“silver services”).
Pick Your Business Model
Support your service products with the right business model. For example, when consumers can tolerate some level of product failure (a flat tire or a faulty air conditioner) use a conventional model in which the customer owns the product and pays for support services as needed. When product performance is critical, consider a business model where customers lease products and are guaranteed performance through immediate onsite replacement or repair. Many commercial airlines use this model, paying an hourly fee to GE or Rolls-Royce for using aircraft engines instead of buying them.
Determine Organizational Structures
In many companies, the manufacturing and services functions bicker over which is responsible for inventory carrying costs. Eradicate infighting by establishing joint services-manufacturing teams who set priorities for the use of parts by manufacturing, by the services function for warranty servicing, and for out-of-warranty services. Consider outsourcing the delivery of after-sales services to a third-party provider.
Create Your Post-Sales Supply Chain
Establish different supply chains for different types of service products. For example, when speedy service is essential, replace failed products with reserve products pre-positioned at each customer’s site. If low cost is more important than speed, use a centralized repair facility to diagnose product malfunctions and replace only components that have failed.
Also establish prioritization rules for customers. For instance, when spare parts inventory is low, hold it in reserve for higher-paying customers, requiring lower-paying customers to wait until inventory is replenished.
Monitor Performance
Measure your aftermarket performance using customer-focused metrics (wait time for technical assistance and diagnosis, spare-parts delivery time) and internally focused metrics (such as parts obsolescence cost) to quantify the utilization of your service assets.
This is the golden age of services, and to survive and prosper, we’re told, every company must transform itself into a services business. Executives swear by that services-centric view of the world, but privately, they admit to one niggling concern: Most companies either don’t know how or don’t care to provide after-sales services effectively. Top managements the world over treat aftermarket services as a mere afterthought.
