Aftermarket services

Aftermarket services means the money a machine maker earns after the machine has been sold, from spare parts, repairs, upgrades and service contracts. Many machines last 20 or 30 years, so this income can add up to more than the price of the machine itself. It is also often the more profitable part of the business.

Here is how it works in general. The maker sells the machine once. The buyer then needs parts that wear out, a technician to repair faults, and sometimes software updates. Only the maker, or a partner approved by the maker, has the exact parts and the repair knowledge. So the buyer keeps paying the maker for as long as the machine runs.

The buyer has little choice about who supplies these, because a stopped machine loses money every hour. So service contracts are priced on the cost of the stoppage, not on the cost of the part. Some buyers use cheaper parts from other makers or repair the machine themselves. Makers respond by keeping manuals, tools and software to themselves, or by offering contracts that promise a repair within a fixed number of hours. For the maker, this income is also steadier than new sales, which rise and fall with the economy, because machines in use need service in good years and in bad ones.

Take, for example, a company that buys a lift for an office building. The lift costs a fixed amount once, but its maker is then paid every year for a maintenance contract, and again each time a motor or a door part is replaced. Consider an airline that buys an aircraft. The aircraft maker and the engine maker keep earning from maintenance, repair and overhaul work and from spare parts for decades. Say a factory buys a cutting machine. The machine maker later sells it blades, a yearly service visit and a software upgrade, handled by tools such as service parts and aftermarket software.

Because of this, makers often sell the first machine at a small profit, or even at a loss, and plan to earn the rest later. It also explains why makers try to remain the only supplier of parts, and why installed base matters so much to them. The related idea of predictive maintenance lets the maker tell the buyer when a part is about to fail, so the next sale is planned before the breakdown.

How is it different from installed base? An installed base is the set of machines already running at customers. Aftermarket services is the income the maker earns from keeping those machines running.