7 Facts about Service and After-Sales for Machine and Equipment Manufacturers

26. September 2020

Service Knowledge Service Wissen

Machine- and equipment manufacturers are facing a challenging future. Even before the corona pandemic, many companies were already struggling with a sharp drop in orders and declining margins in the new equipment business. For most machine manufacturers, the fact that service and after-sales are going to be important drivers of their future success, is nothing new. Nevertheless, we can see that especially management tends to underestimate the great need for action and the associated potential in service and after-sales. 

In this article, we have therefore summarized the most important facts about service and after-sales in mechanical engineering in order to illustrate the importance and the resulting need for action.

Why is service & after-sales so important for machine and equipment manufacturers?

Declining sales figures, shrinking margins and collapsing orders are currently determining the new equipment business of many machine and equipment manufacturers. This makes it all the more important to recognize the significance of the service & after-sales business and, in particular, to prioritize digitization in service accordingly. With over 1 million employees, mechanical engineering is the largest employment provider in Germany. Here, service is the most important driver for profitability, growth and differentiation. Manufacturers with excellently organized service activities benefit not only from higher profits but also from increased customer loyalty and a higher referral rate. Proactive service enables manufacturers to respond to their customers’ needs better, faster and more precisely which then leads to significantly increased sales numbers.

7 Facts about service and after-sales for machine and equipment system manufacturers

Our hypothesis: manufacturers that now focus on service and after-sales will emerge as winners from this phase. This hypothesis can be illustrated by looking at the figures below:

1. Greater resilience in times of crisis

In times of crisis, new sales drop by an average of over 20%. Service sales, on the other hand, are more resilient in times of crisis and decline by less than 10%. The fact that many operators avoid capital-intensive investments in times of crisis and rather seek to expand the life cycle of their equipment is one explanation. This, in turn, will create more demand throughout the life cycle of machines, e.g. for maintenance, overhaul, repair, retrofit, spare parts, etc. During the corona pandemic, the situation initially changed, especially when compared to the financial crisis of 2008. In the lockdown/isolation phase Q2/2020, not only new machine sales collapsed, but also service sales declined as service technicians were no longer allowed to travel, for example. However, over the coming months, a recession, with an even slower recovery, is expected. As described above, experience shows that service revenues are more resilient during this recovery phase.

2. Higher profitability compared to new installations

The margins for service sales across 30 industries are around 25%, which is about 2.5 times higher than the margins of new sales in the machine manufacturing sector. This enormous potential is often too little or not fully realized by manufacturers, as most manufacturers operate purely reactive in their service activities, i.e. they proactively offer their customers little or no customized service and after-sales offers.

3. Higher growth in service

Throughout the years from 2006 to 2012, meaning also in the years following the financial crisis, service sales in the machine manufacturing sector grew on average much more strongly and rapidly than new sales. This development will continue to shape the industry in the coming years. Hence, it is crucial for manufacturers to recognize this at an early stage and prioritize their service business right now.

4. Greater predictability of service sales in times of crisis

New machine sales showed significantly higher fluctuations over the years 2006 to 2012. The variance in annual sales was on average 2.1 times higher compared to service sales. This means that service is a reliable and continuous source of income even in times of crisis.

5. High potential for growth in after-sales revenue

According to McKinsey (2019), manufacturers who have full transparency of their installed base and prioritize service sales can increase their after-sales revenue by 30 to 60 percent within 3 to 5 years.

6. Available market space for proactive service

According to the VDMA (2017), manufacturers in the mechanical and plant engineering sector currently only provide services for around 10 to 25% of their installed base. There are many reasons for this, ranging from unawareness of the installed base itself to a lack of knowledge about customers, location and condition of the machines sold.

7. Large influence of service quality on investment decisions

According to Deloitte (2020), service quality is by far the biggest factor (around 50%) for customers of machine and equipment manufacturers when deciding on an investment. In comparison, product quality and price together account for the same share.

As described above, the general importance of service and after-sales is not big news for most machine and equipment manufacturers. Nevertheless, a glance at the figures often provides the right impulse to get started with digitalization. In addition to the latest numbers, data and facts summarized above, the question of where and how to start setting up your service business today for the digital future is crucial.

So what should you, as a manufacturer in the machine and equipment manufacturing sector, do today to exploit the potential in service and after-sales of your installed base? We would be happy to help you find out how you can gradually emerge from the crisis as a winner with service & after-sales.

More information