Articles
Do our clients really want to buy those shining, depreciating pieces of capital equipment we lovingly make, pack and ship to them? No. They want the use of those assets. To them, asset ownership can be a turn-off. Ownership means money upfront and the assets have to be maintained, which can involve trained staff and spare parts. It’s better if, instead, customers can rent equipment and support.
Think aeroengines – among the most sophisticated technical products available. They travel worldwide, operate in all sorts of conditions, and need a constant audit and service trail – which means a dedicated support network.
Take the business model one step further. Over the life of a capital product, what is the need and cost of replacement components and associated labour to support the product? In many industries, aftermarket support is a real sales opportunity and can be greater than the initial capital cost.
Who is selling that support service? Are you, or is it a third party? Equally importantly, whose components are being fitted – genuine replacement components made, or approved and branded, by you, or are they using spurious parts? What might those third-party, spurious components mean for the effectiveness and continued well-being of the capital goods you originally supplied?
Spurious parts might malfunction, and it would then be your reputation that suffered. When did you last hear of an inquiry into an incident regarding a malfunction that named the provider of non-genuine parts as the cause of the problem? All too often, the immediate assumption is that every part fitted is “genuine”.
For lower-cost capital goods, a captive and managed aftermarket might not always be possible. But for higher-value goods, such an aftermarket might provide a realistic, longer-term profit opportunity.
If margins are tight on the new product, how profitable is the aftermarket? In the automotive industry, for example, the parts aftermarket is the most profitable sector – the challenge is ensuring that genuine, rather than spurious, parts are fitted. Barriers to entry are low for non-genuine parts. Providers tend to cherrypick what they will supply and leave the more technically demanding, or less frequently used, parts to the original supplier, having taken a goodly slice of the available profits elsewhere.
Perhaps the best way to control the aftermarket is to hire the capital goods and then maintain them for the client. If you can provide a maintenance-lease type of deal for the asset, you can have a significant influence on the aftermarket. A well put-together agreement can offer a good opportunity to participate in aftermarket opportunities, as well as a margin on the initial capital cost.
Such an arrangement might mean the initial cost could be lowered and the capital cost amortised over time. If the equipment can be leased against a maintenance deal over a predetermined period, you might take a profit on a little-but-often basis rather than in a single hit.
However, the arrangement will need support. Initially, you might need a finance partner. They will want a margin and have their own risk profile to apply, but that is a margin on the finance as much as the capital good. Equally, you might need a network of trained local support, whether selling nationally or globally. Their margins could come on the components and aftermarket service offered.
The big spin-off is retaining your potentially profitable aftermarket. The client needs, and will pay for, product support. There is a further spin-off. If you are providing the aftermarket care, your staff should be close to the equipment and know when it is due for replacement or showing its age. That’s getting a step ahead of the competition.
