For certain organizations the aftermarket[1] can be an afterthought, with many companies choosing to invest their time and resources in product development and new markets that are dedicated to growth. Yet based on the work we have done in the aftermarket, we believe that it can be a profitable complement—a hidden gem so to speak— for many business-to-business companies to create and capture value.  However, tapping into an aftermarket’s potential can be tricky and requires that executives perform a thorough analysis to decide whether they should play and, if so, how to optimize resources.  

Understand Common Struggles

There are two common struggles that we have seen suppliers face when crafting an aftermarket strategy: measurement and channel structure.

Measurement

Certain aftermarket information must be available to make decisions and manage the business, such as market size and margin potential, which are critical. However, this data can be difficult to find.  Where good data is unavailable, we use a variety of estimation methods to triangulate an approximation of market size.  Unlike the original market, there are many different points of sale to the end consumer, so market size figures can be murky. When estimating the size of the aftermarket, a good place to start is to determine the size of the installed base of original equipment.

For this article, let’s consider manufacturers of air filters for lawn mower engines. The air filter manufacturer sells it products to original equipment manufacturers (OEMs) to be installed in new lawn mowers that will then be sold to a retail merchant before it is sold to an end customer. Based on the engine manufacturer’s specifications, end consumers should replace the air filter annually to keep the lawn mower running efficiently.

If we know that the installed base of lawn mowers in North America is 50 million units and that 50 percent of owners replace their air filters annually as recommended, then we can estimate that the annual air filter aftermarket in North America is a least 25 million annually.  The difficulty is vetting and triangulating assumptions, like the 50 percent replacement rate.

Channel Structure

The aftermarket also requires a different business model than an OEM business.

Aftermarket customers are typically served through different channels, so a supplier needs to understand the profit available in each channel and determine each individual channel’s marketing strategy.

It also is critical to understand the margins available in the aftermarket.  Suppose that we identify two channels that dominate aftermarket sales and in each channel purchase decisions are driven by different factors. An analysis of these factors enable us to determine the strategic fit of each channel with the supplier organization. Going back to our air filter example, assume one channel goes through retail mass merchants that value branding to accelerate inventory turns versus another channel through residential repair shops where price is the most important factor.  Let’s assume the retailers can achieve higher margins on branded air filters than the residential repair shop. Therefore, a supplier with a strong brand will be able to achieve better margins in the retail channel and should allocate resources appropriately.

Set the Right Strategy to Create and Capture Value

An aftermarket’s customer chain can be very complex with multiple intermediaries before the product reaches the end customer. The end customer may be the repair shop, retailer, or dealer (Figure 1). Yet at each stage of the customer chain there is an opportunity for value creation.  Therefore, an organization’s aftermarket strategy should align with the channel structure because value creation opportunities vary by channel.    In the aftermarket there are multiple intermediaries before the product reaches the end customer and at each of these steps there is an opportunity for value creation along the customer chain.  For example, a supplier will work with a distributor to fulfill the distributor’s orders from lower volume end customers, sell direct to larger end customers, and continue to sell components to the OEM who may package and sell them alongside other parts.  In other words, the customer chain can become very complex.

Figure 1. Aftermarket Customer Chain Examples

Going back to the air filter example, let’s think about the channel to retail versus the channel to residential repair shop. The retailer buys a high volume and therefore can buy directly from the manufacturer.  The manufacturer can add value by working with the retailer to develop packaging that fits well on the rack and pulls DIY (Do-It-Yourself) consumers toward a purchase. Alternatively, the residential repair shop may only sell a few filters as part of an annual maintenance package; they will buy product from a distributor.

Now, consider the economics of the repair shop business to hypothesize on value creation opportunities. The price charged to the end consumer for annual maintenance is fixed and the DIFM (Do-It-For-Me) equipment owner does not prefer a particular brand of filter, so the repair shop wants to buy the lowest cost filter from the distributor. Perhaps the supplier can develop a package that is more efficient for the small repair shop thereby enabling the shop to pay a higher price for a filter and increase profits.  An example might be a bulk package of air filters that enables the repair shop to store more filters in a smaller space.  Instead of the repair shop buying fifty single packs of filters that must be stored in a bulky box on the shelf, the supplier can offer a compact bulk pack of 50 that fits in a smaller space thereby enabling the repair shop to reduce the space allocated to air filter storage and reduce the time it takes to unpack a new filter.

The aftermarket can represent an opportunity greater than the original market, but companies must overcome the measurement difficulties and recognize that supporting the aftermarket channel can requires thinking that is different than OEM thinking.  To overcome these obstacles, business leaders should be armed with information that enables them to make the strategic decisions required to create and capture profitable growth in aftermarket opportunities.

Learn More About Aftermarket Growth Strategies

Lessons Learned from the Aftermarket, identifies several aftermarket trends, which, if capitalized on appropriately, can improve an organization’s ability to win in the aftermarket. The industry stories included provide perspective on areas to evaluate within a business.

Case Study: Leading Global Manufacturer Looks to Increase U.S. Market Share in Outdoor Power Equipment Aftermarket

[1] The aftermarket is the demand for repair and replacement parts that are required to keep original equipment running over its lifetime.  The original market is where products are sold or installed onto original equipment.  The aftermarket is the purchase transaction when these products need to be replaced as part of routine maintenance or because equipment breaks down.