5 success factors for expanding the service business

Without the consistent expansion of their after-sales portfolio, machine and plant manufacturers will have little chance of prevailing against increasing competition in the future. The sense of a consistent service strategy is obvious. The ServiceLobby reveals the 5 most important prerequisites for success.

Service managers plan to expand their after-sales business for a variety of reasons. Some want to secure their market position, others are hoping for better margins in service than in their primary business. Many also want a more constant source of revenue in order to prepare for a weakening economy.

Research confirms the positive effect of service expansion on machine sales, service profitability or the general profitability of a company. At the same time, our colleagues at Bain claim that only 21% of companies are successful with their service strategy.

Further studies suggest that 25% of the companies in the expansion of their After-sales portfolios even lose money or at least reduce their profit margin. The costs often exceed the additional revenue.

Service is obviously not a sure-fire success. A study from 2014 addresses precisely this point and examines what is crucial for the successful expansion of the after-sales portfolio.* To this end, the service strategies and their impact on turnover and profit of more than 500 German mechanical engineering companies were examined. The results can be summarized in 5 success factors:

Success factor 1: Be patient!

Build up your service business step by step! It is not expedient to start immediately with 10 different after-sales services. This would overwhelm both the sales team and customers. Especially if you have only been active in pure product sales up to now. Services work differently.

It makes sense to train employees appropriately to build your service sales team. Expanding your after-sales portfolio can be a great career development opportunity for your technicians.

Start focused and develop a sensible sales strategy first. Once you have implemented this, you can then get started with additional services.

The expansion of the after-sales portfolio is initially accompanied by higher sales costs. Margins will therefore initially be lower. In the end, however, companies with a broad service portfolio are more successful. Once you generate more than 25% of your turnover with after-sales services, this effect will generally be reversed.

Success factor 2: Establish profit centers!

Profit center approaches can help you avoid falling into a cost trap when expanding after-sales services. They offer you an overview of sales and costs at product level, in contrast to a merely generic overall calculation that includes the spare parts business and the operational people business (maintenance, repairs, consulting, etc.) together. It is comparatively easy to make a profit with the spare parts business. However, spare parts margins will fall in the future due to greater transparency and new competitors on the market (e.g. Amazon or specialized boutiques).

It is therefore important to manage profit centers at product level. This allows you to determine which services are profitable and which are not. Here, too, it is necessary to be patient with new product groups or services. However, it should be monitored whether success is achieved over time. Otherwise, it is similar here to the usual product business: life-prolonging measures only make sense up to a certain point. If there is no long-term success, the portfolio must be adjusted.

Success factor 3: Introduce product-related services before higher-value services!

Some companies immediately jump on trend topics such as Predictive maintenance or Self-service-technologies in order to develop and distribute services on this basis.

In principle, there is nothing wrong with this. However, the standard services should be offered across the board beforehand. If you only sell these selectively to a few customers, you will not be successful with higher-value services either.

You should start with the standard business before venturing into the freestyle. As long as no more than 50% of the installed base is under maintenance or higher value contracts, there is no need to think about predictive maintenance. If you have not been able to convince your customers that conventional maintenance is beneficial for them, it will be difficult to convince them of the benefits of predictive maintenance. The level of trust required would be much higher.

Those who adhere to this principle can easily cover the costs of building a promising portfolio and the associated development and market launch costs with the profits generated by standard services.

Success factor 4: Drive decentralization!

They need to be able to react quickly and agilely in order to avoid missing out on opportunities for high growth rates. This requires a decentralized structure.

You should not manage local service units from a head office. Service management must be set up locally, with far-reaching operational powers and its own profit center accounting. The individual units can then be controlled via a target matrix and act autonomously in operational terms.

A sensible target figure for such a self-sufficient unit is 10 technicians. Below that, the overhead costs for management and controlling are too high. With a significantly smaller team, it becomes increasingly difficult to support all existing product types in a market at a high level and without central support.

Success factor 5: Introduce new services to loyal customers first!

Test new services with customers with whom you have a longstanding partnership. My personal experience on this point is also supported by research.

Loyal customers help you to keep service delivery costs under control and make it possible to earn money with a service even in the early stages. At first glance, it sometimes seems sensible to implement a pilot or initial rollout with a difficult customer because they fit the required profile. However, I would advise against this.

On the one hand, the difficult customer will require considerably more support than a loyal customer. A loyal customer will be much more forgiving of teething troubles. In addition, a permanently dissatisfied customer can also make your sales team lose interest in the new service. Sales employees do not like to talk to customers about problems and try to minimize such potential risks as much as possible.

If you keep these 5 points in mind, you can get off to a successful start in the area of after-sales services.