I know, I know…this sounds like clickbait. Maybe it was if it made you read this post, so hear me out.
After 25+ years of being in and around the Industrial OEM world, I had been reluctant to acknowledge what executives and others have told me for years: Aftermarket is an afterthought in most companies.
The stubborn entrepreneur, and more importantly, former Aftermarket leader in me has a really hard time accepting this characterization of a market that I know and love so well. And more importantly, observing our customers’ experiences and analyzing data to really understand what was happening made me realize that these observers were both right and wrong. And it was time to reframe the entire business and profession differently.
“Marketing is too important to be left to the marketing department” – David Packard, co-founder of Hewlett Packard
So with apologies to Packard:
“The Aftermarket is too important to be left to the Aftermarket department”
Here is why.
Analyzing 10 years of data across almost a million end customers and almost 200 million transactions we found that: 1) OEMs with a larger share of repeat customers achieve faster new equipment sales growth rates by almost 2 percent (or 33% higher than the mean), 2) these repeat customers were more “consistent and frequent” aftermarket customers of the OEM. Specifically, about 70% of new equipment sales come from repeat customers, and of these, 89% are actively using the OEM’s aftermarket offerings including parts, services, consumables, etc.
In other words, if you want faster equipment sales growth, make sure that you take care of your Installed Base’s aftermarket needs.
Here is the reason why: for every equipment transaction, there are 8+ aftermarket transactions per year or more than 100-120 over the lifetime of that equipment. In other words, many many more opportunities to continuously influence the customer’s perception of the OEM. Or said another way, 100-120 times more “moments of truth” than the initial equipment purchase. And those OEMs that take good care of their customers – responsive, proactive service; parts availability, technical support, etc – are winners in these moments of truth.
If that wasn’t enough, here are 2 more financial reasons for CEOs to care about the Aftermarket: higher valuation multiples, and better shareholder returns ascribed to OEMs with successful Aftermarket businesses.
So despite these facts, why is Aftermarket an afterthought? Over the course of my career, I’ve seen the doom loop in action:
- There is no explicit aftermarket strategy, except “don’t screw up and hurt operating margin”
- Consequently, this is a talent deprived business function
- Which doesn’t make waves, but doesn’t become a star performer,
- Therefore doesn’t receive the investment needed to succeed
- Which causes the business to not perform to its full potential
- Back to step 1
So why isn’t Aftermarket on the CEO’s agenda? Why is it not treated as a legitimate business unit of the corporation? Why aren’t the best leaders focused on this business?
I call it the tyranny of low expectations.
Which is a shame, really.
The only function in an OEM that is constantly in contact with the customer is the Aftermarket or Services function. It has the biggest opportunity to influence the perception of the OEM in the eyes of the customer. It has the biggest opportunity to make a difference in the financial performance of the OEM. It has the biggest impact on the bottom line of the OEM.
It is so important to the CEO that she should oversee it with a C-suite direct report. Led by her best business partner who is involved in the critical decision-making processes that matter to the company. Because after all, he will inherit the aftermath of the upstream decisions for years to come.
It is time for the Aftermarket to be in the hands of the CEO.