Vendavo Reveals Fewer Manufacturers Benefitted from Aftermarket Services in 2022
The 4th Annual Aftermarket Benchmark Study from Vendavo & Copperberg Identifies Manufacturers’ Aftermarket Regression and 2023 Growth Prospects
Vendavo, the global market leader in B2B price management and commercial excellence solutions, revealed more manufacturers did not realize the full benefits that a robust aftermarket services business can deliver to the bottom line in 2022. The global 4th Annual Aftermarket Benchmark Study, conducted by Copperberg, found 65% of respondents reported aftermarket revenue represented less than 29% of their total company revenue – the most at the lowest contributing threshold in the four years of the study.
On a scale of 1 to 10, 10 being highest, the majority of respondents ranked the degree of change taking place at their organization a 7. That change manufacturers are experiencing was not for the positive in aftermarket services however as over the span of the four years of study, manufacturers who realized aftermarket profits as more than half of their total organization profits decreased to its lowest point in 2022 at just 17 percent.
“While the unfortunate regression in the aftermarket business can be at least partly attributed to the global volatility we’ve seen over the last 4 years, it can also be considered a missed opportunity because we know a strategic aftermarket services business drives revenue and profitability,” says Mitch Lee, Profit Evangelist, Vendavo. “And now, more than ever, manufacturers are looking for a profit boost.”
The aftermarket business includes the sale and delivery of spare parts, maintenance, and other value-added services. According to McKinsey & Company, one analysis across 30 industries shows the average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services was 25 percent, compared to just 10 percent for new equipment. In today’s volatile economic landscape, aftermarket services deliver higher margins. Price improvement delivers greater profitability – a 1% price improvement results in an 8.7% increase in operating profit.
Other findings from the 4th Annual Aftermarket Benchmark Study include:
- The number of manufacturers operating their aftermarket business under a Break/Fix model increased to its highest point in 4 years (33%)
- Inflation has had some or a significant impact on manufacturers’ service operations margins (86%)
- Cost-plus pricing models surged as a primary pricing strategy in 2022 (62%), up from around half who used the base-level price optimization levers in the previous three years (50%)
- Robust aftermarket services require advanced digital transformations and more manufacturers have made progress in developing a digital strategy either partially (37%) or they now have one (31%)
- Bigger technology budgets are in plan for the majority of responding manufacturers. The top planned spend is remote diagnostics (61%) followed by e-commerce platforms (42%) and service automation (41%).
“The perception and significance of the aftermarket business relative to overall business growth has greatly diminished over the last four years,” says Lisa Hellqvist, Managing Director, Copperberg. “In times of financial downturn, we tend to focus on our existing customer base, and hopefully with the investments made in digital strategy and technology, we should see an improvement of those forementioned numbers as the industry has geared up for a more insightful and data driven aftermarket and service function. But only time can tell if those investments will be fully leveraged.”