Download FREE spreadsheet – Aftermarket Profit Impact Calculator
Let’s say you want to grow your aftermarket service revenue and profit. That’s going to require an investment of some kind.
Watch this video to learn:
- The 10 levers of aftermarket value that drive business growth and profitability
- Why investing in sales and marketing often fails to grow your business and what to do instead
- How to work out your financial benefits and investment case for aftermarket
- How to access this innovative aftermarket growth method for your business
Hello, I’m Adrian Botham of Servispart Consulting and I’d like to welcome you to this, the 3rd video, of our 3-part series.
If you’ve not watched the first two videos yet, then I strongly request that you stop this video and go and watch both of them before coming back to this one – I promise I’ll still be here!
The first one was called “Manufacturing Services – a contradiction in terms or missed opportunity?”
The second was called “How to 4X your sales without having to find new customers”
And when I say 4X, I wasn’t talking about a well-known Australian lager brand that was very popular in the 80s!
I was talking about quadrupling the sales of your manufacturing business.
If you want to do that, you’re going to love this 3rd video because it builds on all the stuff we’ve learned so far and unveils the innovative aftermarket growth method that your competitors don’t want you to know about.
I’ll also be explaining what the financial benefits of using it might be for you and how you can access the aftermarket growth method for your business.
Before I get to that though, as before, let’s just take a minute to have a quick recap of what we’ve covered so far.
Recap of the last two videos
In the first video, we talked about the challenges you face as a manufacturer in today’s business environment.
We talked about why differentiation is the best way for most manufacturers to provide sustainable customer value and business growth.
And we talked about how service innovation has now become the primary method of differentiation for manufacturers of engineered products.
We then explored how manufacturers can optimise customer value generation and maximise their share of the available revenue.
And in our second video, I asked the question “are you making the most of your aftermarket” and showed you some key stats regarding the compelling opportunity on offer, to potentially quadruple your sales and do even more with your profits.
Financial impact on your business?
What I’d like us to do now are some simple calculations to work out what the financial impact of developing your aftermarket business might be.
Get yourself a pen and a piece of paper or a pad.
Do it right now and pause this video if you have to.
I’ll wait here.
On the top half of your pad or paper, I want you to divide it into 3 sections by drawing 2 lines like this and label the columns as current, average and future.
On the left, we need 3 rows.
Might also be a good idea to mark the top left corner as “sales.”
Now, in the first column, I want you to write the current sales figures for your business, breaking down the total into product sales and aftermarket/service sales.
Add the percentages.
I’m just showing a worked example with easy numbers.
In the middle column, keep your product sales the same as current, but work out what the service sales would be if those product sales represented 75% of your business. (explain how to do maths)
In the future column, replace the 25% of service sales with a bigger number that you’d like to achieve.
I’m using 50% here, but you can go higher or lower.
Then work out the services number, keeping the product sales the same as previously.
Now we have the sales figures, we’ll do the same for the profits.
So on the bottom half of your pad or paper, draw 2 more lines, label the columns as before and the same 3 rows, but label this section as “profits.”
To calculate the profit numbers, we need to know the margins for sales of products and services in your business.
For my example, I’m going to use 10% for services and 3.3% for products, which are very conservative but they make the maths easy.
If you don’t know what the respective margins are for your business, then that in itself should tell you something!
Resolve to go and find out your real numbers and just make an assumption for now.
Using these margins, and the current sales figures above, gives us (explain figures).
Let’s also do the same for the average and future columns.
Remember to pause the video if you need a minute or two to do your calculations.
Now we’ve got the figures, let’s also work out the percentages.
So in the current column, I have 25% profits from services and 75% from sales.
In the average, its 50% for both and in my future column the starting position has reversed so that I’ve now got 75% of my profits from services and only 25% from products, despite my sales being the same for both.
Of course, the profile and pattern depends on your business, so take a minute to look at your numbers.
How do they compare to mine?
Any thoughts or revelations coming to mind?
If you’re doing this for the first time, it’s not unusual to have an epiphany moment!
Another thing I want you to consider is the dramatic growth in profits from services compared to the growth in sales.
In my example, we see a tripling of profits from an 80% growth in sales.
Again, it depends on your relative margins, but the ones I’ve used are fairly typical and so if yours are a lot different, you’ve either got a margin expansion opportunity or a really strange business!
Now that we’ve done that, keep it handy because we’ll use some of the numbers for the next bit.
Return On Investment (ROI)
Developing the service aspects of your business is more than likely going to require some investment.
Return on investment calculations are a popular way of justifying investment opportunities and also working out what we can afford to invest.
So let’s do that now.
On a clean sheet of paper, mark out 3 columns on the top half of your pad or paper again, like before.
In the left hand column, we need 3 columns this time, titled Return, ROI and Invest.
And again, to make the maths easy, I’m going to assume we are investing £100k, to achieve a £100k return, which is an ROI of 1:1.
This return could either be cost savings or, in our example, it is profit growth from increased sales of services.
This first example just generates enough of a return to get our investment back and so this represents the minimum case scenario that could justify an investment for most businesses.
Alternatively, if we could double our money, we’d have a 2:1 ROI, which if you were investing in property, shares or a new machine for your factory, you might consider a solid investment, yes?
I obviously can’t see you, but if you’re pulling your face at this point and thinking you want a better return than that, then there is something else, that people often forget about and we need to consider.
Which is that, ROI also depends on the time period over which we are measuring our returns and at the moment, we are only looking at the profit growth for 1 year.
So let’s use the other 2 columns to look at longer periods of 3 years and 5 years, which are typical of strategic planning periods for most businesses.
Again, if it was a piece of property or machinery you were buying for your business, you’d be looking at a payback period considerably longer than this – at least 10 years if not 25-30 years or even more.
So if you want to use a best case of more than 5 years for your own example, feel free.
Now let’s fill in the missing numbers in the columns. Pause the video again if you need to.
Now we’ve done that, notice how our unexciting ROI of 2:1 has turned into a very exciting 10:1 return, when we measure over a much more reasonable 5-year period!
It’s not too shabby returning 6:1 over 3 years either.
I’m sure you’d be happy with a return like that on your share investments or pension plan – I know I would!
Put your pen down now, because I need to explain the next bit fully before I ask you to calculate a real example for your business.
What I’m going to do is refer back to our financial impact calculation, and take the profit increase that we got in my example from increasing service sales from the current 10% of total to the average 25% of total.
If you remember, this was an increase of £2m in my example.
So I’m going to put that in column 1, and assume a required ROI of 10:1.
So the amount of investment I could afford if I need a payback in 1 year is £2m, divided by 10, which is £200k.
Over 3 years, our profit increase becomes £6m and so for the same 10:1 ROI, we could afford to invest £600k.
Similarly, over 5 years, it turns into a total return of £10m and thus we could have afforded to invest £1m at the beginning to generate that.
I now want you to do this calculation for your business, using the increase in profits that you want to see for your business.
If your current position is a proportion of service sales less than 25%, then you could do the same as me and work out your available budget to reach the average.
Alternatively, you could go all the way and use your future profit number instead, it’s up to you.
Either way, the calculation to use is as follows: annual profit gain you are seeking, times the number of years over which you measure your return, divided by the ROI required to pass an investment case in your business.
Here’s what it looks like for my numbers.
Now do it for yours. What do you get?
What we’ve done here is something that most business leaders don’t do.
We’ve worked backwards to understand how much we can afford to invest.
If you’re not used to doing this, it can be a real eye opener. Many business growth projects never get started, despite them being much more achievable and affordable than you imagine.
There’s now one more calculation that we are going to do and this is rarely ever done, even though it is much simpler and quicker to do.
I remember my boss, who was an IT director doing a calculation like the one I’m going to show you next, more than 20 years ago and it was extremely powerful.
Cost Of Inaction (COI)
I like to call this the Cost of Inaction or COI for short.
I can’t remember what my boss called it – all I can remember is the number he used – which is kind of the point really.
So, this time we need 4 columns on your pad or sheet of paper.
In the left column, we put the annual profit gain that we are expecting from selling more services, which in our example is £2m.
I’ll also add examples for £1m and £10m, just so you can use them to calculate your figures a bit easier, if you want to.
This number represents the amount of extra profit that your manufacturing business is losing out on by ignoring your service growth opportunities.
If we divide these numbers by 12, we get the profit lost every month.
Divide the original £2m or whatever your number is by a nice round 50 weeks and we get the profit lost every week.
Similarly divide by 250 to get the profit lost every day that we sit on our hands doing nothing or keep kicking the can down the road.
When my boss did this 25 years ago, we were implementing a new ERP system and I was a young Systems Development Manager.
One of his methods was to keep reminding us at project meetings that it was costing us £37,000 in extra running costs for every week that we had to wait for our new ERP system to be implemented.
Bear in mind this was more than 20 years ago.
I shudder to think what the equivalent number would be nowadays.
I didn’t enjoy hearing it, but it worked I can assure you it worked.
Working out the cost of inaction for your investment projects and programmes is a great motivator, preventing procrastination, apathy, inertia, etc.
If you’ve not worked out the actual numbers for your business, then pause this video again and work it out now.
Have you done it now? What numbers do you get?
How do you feel about developing your service opportunities now?
If we look at the Cost Of Inaction alongside our Return On Investment numbers calculated before, we now have both sides of the coin.
The ROI tells us how much we could afford to invest to realise the planned profit gains. And the COI tells us how much profit we are losing every year, month, week or day that we delay getting started.
If you’ve been skiving off up to now and not doing your own calculations, then I encourage you to stop skiving and go do it.
If your crap at maths, then just get your finance director or someone else to do it for you. You’ll both be astounded by the numbers.
To make it easier for you, I’ve included a free spreadsheet below this video on my website that you can download.
Download FREE spreadsheet – Aftermarket Profit Impact Calculator
You’ll be able to use it for all your investment projects in future!
Manufacturing service maturity
The other thing I talked about in our second video, was manufacturing service maturity and what the service transformation journey actually looks like for a manufacturing business.
Service transformation is not easy for manufacturers though.
The 10 levers of aftermarket value
According to our research and experience, there are 10 capability areas that a manufacturing business MUST focus on to maximise aftermarket growth and profitability.
If any one or more of these areas are missing or under-developed, then it can seriously constrain your profitability, regardless of the stage you are at on the service maturity staircase I showed you.
Sales and marketing are often the first areas that uninformed business leaders turn to when they want to grow their business.
They go out and recruit a fancy new sales person or spend money on sales training, assuming that will bring in the new customers.
Unfortunately, that only works if sales and marketing weaknesses are the total reason for your sluggish aftermarket growth.
If your problem is that you never have the right parts in stock when customers demand them, like it was in one of the case histories I showed you in video 2, then more fancy sales people and skills training will not increase your sales and profits, they’ll just increase your costs and decrease your profits instead!
Looking at the Servispart Growth Wheel, it’s obvious that Marketing and Sales, covered here by Customer Intimacy and Business Winning, are only 20% of your aftermarket capability.
80% of aftermarket capability development and aftermarket growth, therefore has nothing to do with sales or marketing!
Which of the capabilities shown here might be holding your business back?
80 things to improve the value of your company
Those 10 levers break down further into about 80 individual level 2 capabilities that are mutually exclusive and collectively exhaustive.
These are the essential capabilities that you need to invest in to grow your aftermarket service business.
Analysing your aftermarket capability at this level of detail is quite rare – have you tried to do this in your business?
If you have, then you’ll know how important it is to have the right tools and methods to enable you to focus on, analyse and invest in the right capabilities for your own business situation, because every business is different.
Example level 2 gap analysis for one of the 10 levers
This is an example of a gap analysis for 8 level 2 capabilities within just one of the 10 capability levers that I showed earlier in the Servispart Growth Wheel.
When I started taking a more scientific approach to aftermarket capability development like this, 20 years ago, it was a revelation for my clients.
In one of our case histories that I haven’t shared with you yet, an assessment like this unlocked a £70m opportunity.
When I did it again a few years later at BAE Systems for the Tornado ATTAC case history I shared in video 2, it unlocked two improvement opportunities of £100m each, and laid the foundation for a £1.3billion availability contract and went on to generate £5billion of extra revenues in the next few years.
Back then, I knew I was on to something big.
Capability maturity, assessment and development is a powerful, holistic approach to business growth.
And when coupled with an aftermarket capability model, like Aftermarket 360 that you see here, it provides a powerful aftermarket growth method.
Our Aftermarket 360 Capability Assessment Tool, calculates scores for each of the 80 capabilities as well as an overall benchmark score for your aftermarket business.
That enables you to identify capability gaps and analyse your capability profile.
It’s also a benchmark improvement tool and process
Re-running the benchmark on a periodic basis enables improvement to be tracked.
This is especially useful during a period of aftermarket transformation and capability investment because business leaders need to know that their investment is having the desired effect.
Tangible operational and financial benefits
It’s also vitally important that you are able to track real operational and financial benefits too.
Because they are the things that will give leaders the confidence to invest in your aftermarket capability in the knowledge that it is delivering strong impact and results.
Our capability assessment tool therefore incorporates multiple KPIs that we can track alongside your benchmark capability scores.
Aftermarket capability drives profitability
From performing capability assessments such as this over many years across multiple equipment sectors, we have proved the existence of a very strong correlation between aftermarket capability improvement and business profitability.
So, if you were to do a benchmark like this for your business:
- how do you think you would score?
- what potential would there be for increasing your score?
- and how much of that extra profit that you calculated earlier, might that generate for your company?
If you’d like to talk to us about helping you do something like this for your business then we’d love to hear from you.
Our contact details are available on our servispart.co.uk website and via the link below this video.
Why leading manufacturers use this aftermarket growth method
Over the years that we have been using this aftermarket growth method with OEMs, parts manufacturers, aftermarket parts distributors and aftermarket logistics service providers, we have delivered lots of powerful results.
Some of them are showing on the screen right now but these are just a very small selection of what we have achieved together with our clients.
And these are just the measurable ones!
Many qualitative benefits have been delivered too such as enhanced credibility with customers, greater supply chain agility, improved service image, increased customer loyalty, and so on.
Book a free Aftermarket Growth consultation
If you’d like to know more about how we could work together to grow your aftermarket business and deliver more value, then please get in touch with us.
As I mentioned before, the link to the relevant page on our servispart.co.uk website is below this video.
The link will send you to our free consultation page, where you can book a free Aftermarket Growth consultation with one of our aftermarket experts.
When we talk, you’ll get honest feedback from an expert who knows your industry and you have my assurance – there will be no hard sell or obligation.
So if you think it might be worth a discussion, contact us today.
Well that’s it for this 3-part video series.
I hope you’ve enjoyed watching it as much as I have delivering it.
Remember to get in touch with us if you want to talk about how we could help you grow your aftermarket business.
And keep a look out for our emails – I’m not promising anything, but you never know when we might send you a nice surprise!
Until then, feel free to provide me with any comments or feedback you might have, at the bottom of this page.
Thanks for watching. See you soon!