Whether manufacturers serve consumers, other businesses, or governments, the aftermarket and service matter. For many OEMs, what began as a relatively unsophisticated side business selling spare parts now contributes to a majority of their margins: these can be up to four times as high as they are for new units. This pattern is evident among top market performers, as companies that have excelled in the aftermarket and service have been strongly rewarded over the past 15 years, with double the TSR of companies that don’t focus on service (Exhibit).
The importance of aftermarket and service has been more differentiating and acute amid recent economic conditions, in which uncertainty, high inflation, and high interest rates have pushed many companies to postpone capital investments. Generally, capital expenditures are higher when investing in new production lines compared with aftermarket and service, such as maintenance or upgrades to the existing installed base.
At the same time, the increasing prevalence of firmware-driven updates across industries has further reduced the usual need for up-front capital investment required for aftermarket and service, while also limiting disruptions to activities such as manufacturing. Consequently, companies facing budget constraints may prioritize spending on aftermarket and service purchases over investing in new units, thereby increasing the importance of aftermarket and service in their overall revenue-generation strategy.
Despite its commercial and strategic value, aftermarket and service are often largely untapped. Service excellence—defined as an ongoing commitment to providing customers with outstanding and relevant support and services well beyond the initial sale—can help.
In part 1 of this report, we offer a five-part framework for how to divide the offerings for the aftermarket and service journey, from idea to payment:
- Innovation-to-market stage. This spans the development process and ends with launching an offering into the market.
- Market-to-order stage. This covers the process from business development to the completion of a customer’s order.
- Order-to-delivery stage. This spans procurement, manufacturing, and product delivery.
- Delivery-to-cash stage. This completes the journey, with credit management that smooths the flow of payments from customers to manufacturers.
- Enabling factors. These ensure the success of the overall approach.
In each part of the framework, we delve into the factors that OEMs should consider then discuss the emerging trends and innovations in the field. For more on the methodology that informed this framework, see sidebar, “About the research.”
At the same time, companies that lack a strategic vision for their aftermarket and service businesses often struggle to earn acceptable returns on the substantial up-front investments required. To lay a successful path for ROI in aftermarket and service, leading OEMs use their aftermarket offerings to expand while forging deeper relationships with customers and making their products work better—to achieve, for example, higher throughput, less consumption, and so forth. In part 2, we overview the trends executives are prioritizing in this effort or might consider if they have not yet done so.
This white paper brings together the best of McKinsey’s published thinking on OEMs’ aftermarket and service, with a focus on B2B companies. Drawing on the latest and most relevant news and trends and brought to life with real examples, this report aims to be a catalyst for new, energizing ideas. It is intended for a broad audience, from chief experience officers (CXO) to those curious about the sector and seeking an end-to-end view.
