Better Pricing in the Unglamorous Aftermarket
Beyond the breathless headlines about the latest gadgets and gizmos, a quieter, more reliable engine of economic growth is transforming in the background: Aftermarket Services. Simplistic pricing models simply won’t cut it anymore. Manufacturers need to embrace more sophisticated, value-driven strategies
From a business perspective, for every new gadget sold, there’s a future obligation to maintain, repair and keep it functional. This encompasses a whole ecosystem of replacement parts, upgrades, accessories, repairs, warranties, maintenance and technical support across a wide range of industries – automotive, electronics, industrial machinery, aerospace, medical equipment, and even consumer goods like home appliances or smartphones.
In fact, a recent report from global consulting giant AT Kearney highlighted aftermarket services consistently produce higher profit margins (27%) when pitted against new equipment sales (11%).
While most aftermarket services today are perceived as low-profile, numerous businesses are venturing into them because of the ample potential for some serious growth. Merely existing in the space is no longer enough, the devil lies in the right pricing approach.
This isn’t narrow niche targeting anymore, Kearney reports, discussing how aftermarket services are trending upward in value for manufacturers, from automobiles to complex industrial machines, even aircrafts. The supply chains of these machines become tighter after purchasing the initial product, making such services more favorable. Think of the razor-and-blade model: once you’ve established a customer, they rely on you for everything. And, with newer equipment sales becoming difficult for companies, the reliance on secondary and tertiary market goods increases.
The aftermarket serves both the B2C and B2B sides of the business, usually with a different set of players than the Original Equipment Manufacturers, or OEMs. Such services aim to maximize customer retention and revenue, helping companies sustain long-term revenue growth, with many companies earning a greater amount from aftermarket services than from primary sales. The economics of it are determined by the product lifespan, the intensity of use, the availability of independent third-party servicing and the degree to which the customer is dependent on continuous functioning.
Good aftermarket conditions include older assets, long product life-cycles, high replacement costs and a strong installed base. Recessions often boost activity as users opt to repair rather than replace. On the flip side, newer technologies that reduce wear-and-tear, short product lifespans (e.g., fast fashion or disposable electronics) and OEM-controlled ecosystems (e.g., locked software or proprietary parts) can hinder opportunities.
Predictive maintenance, subscription-based support, right-to-repair legislation and digital platforms are all reshaping the space – offering new revenue models but also raising the competition bar, with focus firmly shifting to sustainability.
Kearney forecasts a 6.5% average annual growth rate for the global industrial services market from 2024 to 2030, relative to a mere 1.1% projected for new equipment sales for the period of 2025-2029. While everyone’s focused on selling the next big thing, the softer narrative is indeed in keeping what we have running smoothly. Companies’ biggest win will lie in creating an enduring partnership with the customer that turns into a lifelong asset.
And this is where the subtle economics of the space come into play! There is no way to simply assign high prices for spare parts or service contracts and hope to succeed. Unlike most heavy-handed assumptions, even the so-called ‘captured customers’ won’t be taken for a ride. Go overboard with aggressive pricing and everyone in the long run suffers. Kearney warns that for many automotive and industrial goods manufacturers, for example, the pricing capabilities of aftermarket services tend to be too simplistic, marked by unclear structure and blended prices – strikingly insensible business.
Image: Growth projection in the global industries services market; Source: AT Kearney
The best way forward-thinking players can look to capitalize favorable market conditions to bulk up margins and eat into the overall market share of their respective verticals is through smart pricing strategies. Aftermarkets are no longer a cost-plus expense. It is value being added to the customer – what’s the real cost of downtime for a factory? What’s the peace of mind of knowing your equipment will be reliably maintained? There’s a high cost to peace of mind, and consumers, more often than not, will pay for it.
The Kearney report outlines a comprehensive framework that goes far beyond simply adding a price markup:
- Price Strategy: Companies must start with strictly defining what overall pricing goals are and how exactly they line up with overall business objectives. Understanding customer’s propensity to consume in different segments is crucial to this. The key is how soon companies figure out if they want to go for premium pricing based on superior service or a more competitive one and look to capture larger market share.
- Price Setting: This is where the rubber hits the road – determining the actual price levels. There are various pricing models to look into: cost-plus, market-based, and crucially, value-based. Prices set based on the perceived value to the customer are considered particularly relevant for aftermarket services where the cost of failure can be high.
- Price Execution: Getting it right on paper is one thing, implementation is an entirely different ball-game. Governance, clear communication and preventing revenue leakage through unauthorized discounts or inconsistent pricing is key to this.
- Price Monitoring: And then, it’s maintaining a well-oiled machine with continuous adjustments through performance monitoring, optimizing win-loss ratios and gathering feedback.
‘Enablers’ such as data and analytics aid throughout the entire pricing process. It goes without saying, pricing to perfection requires a deep understanding of customer behavior, competitor prices and the cost of service delivery data. Additionally, Kearney notes two external areas to keep an eye on: overall industry competition and parallel customer segment bases. Externally, execution and monitoring of prices are the most important for control purposes, assuring goals set on paper are maintained in practice. Bundling and upselling have also been found to be a key feature of most steady aftermarket revenue streams. Warranty or maintenance contracts attached to the original product offered almost guarantees further profitability.
Reference: Read the AT Kearney report (April 4, 2025) here.