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Developing an Aftermarket Strategy

This article was originally published in 2003. The simulation referenced runs on an older version of Forio’s platform, which is no longer actively supported.

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The aftermarket business strategy was conceived in 1906 by King C. Gillette to sell safety razors and blades. It was Gillette’s idea to “give the razors away, but charge whatever traffic will bear for the blades.” Gillette’s aftermarket strategy and his safety razor patent made him a millionaire and the strategy, which became known as the “razors and blades business model,” is still successfully used by the Gillette Corporation nearly 100 years later.

Today the aftermarket strategy is used by a variety of businesses. Aftermarket sales often eclipse primary product sales for both profit and revenue generated. For example, 75% of aerospace and defense providers’ revenue comes from aftermarket support and related sales. Likewise, many other industrial equipment manufacturers rely on their aftermarkets for profitability. The same is true for certain categories of consumer goods—for example, inkjet printers and printer cartridges.

Below is a list of some common primary products and their aftermarkets. Click on the links below to run simulations of these aftermarkets.

Primary Product Aftermarket Product/Service Is the Aftermarket Needed for Profitability?
Automobiles Auto parts and service No for manufacturers, but Yes for many dealers
Inkjet Printers Inkjet Cartridges Yes
Instant Cameras (Polaroid®) Instant Film Yes
Aircraft Engines Engine Parts Usually
Mobile phones Mobile Phone Service Subscriptions Yes
Razors Blades Sometimes
Video Game Consoles Video Games Yes when consoles are first introduced, but not in the long run
Windows® Operating System Microsoft Office® No

Aftermarket Essentials

There are two essential parts to an aftermarket strategy: installed base and lock-in. The installed base is what makes the aftermarket so enticing to businesses because aftermarket products and services are sold repeatedly to the entire installed base of primary product customers. In order to sell to the installed base over several years, a solid aftermarket strategy requires that customers are in some way locked-in to using the aftermarket product or service.

Here’s a simple example that illustrates the power of a good aftermarket strategy and why the installed base is essential to aftermarket strategy success. Say you’ve patented a new three-prong staple and stapler. There isn’t a huge market for your new stapler. You only expect to sell one hundred per year for the next five years.

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Year 1 Year 2 Year 3 Year 4 Year 5
Stapler Sales 100 100 100 100 100

Selling 100 staplers each year means that your installed base is growing by 100 customers each year. After five years, you have an installed base of 500 customers.

Year 1 Year 2 Year 3 Year 4 Year 5
Stapler Installed Base 100 200 300 400 500

Because your stapler is patented, your company is the only producer of three-prong staples. Not only do you sell your three-prong staples to your entire installed base of customers, but you’re repeatedly selling to them. Assume that each customer buys five boxes of staples a year. Your staple sales now look like this:

Year 1 Year 2 Year 3 Year 4 Year 5
Stapler Sales 100 100 100 100 100
Stapler Installed Base 100 200 300 400 500
Boxes of Staples Sold 500 1,000 1,500 2,000 2,500

So selling just 100 staplers per year results in 2,500 boxes of staples sold every year after five years. By Year 5, you’re selling 25 times as many boxes of staples as your are new staplers.

Another appealing aspect to aftermarkets is that sales are less volatile than sales for primary products. For example, assume you stop selling staplers after Year 5. Even with no new stapler sales, if the staplers in your installed base are durable, you can still sell 2,500 boxes of staples in years 6 through 10. The magic of the aftermarket.

Try the aftermarket simulation to get a deeper understanding of the how this installed base works under different market scenarios.

Aftermarkets and Lock-In

If customers are able to buy their aftermarket products from competitors or third-party suppliers, then the whole strategy falls apart. Aftermarket sales are strongest when customers are locked-in to buying from the company that sold them the primary product. Customer lock-in can be achieved through a variety of means including service contracts, technology, service expertise, and patents.

Lock-in through service contracts has been used for years by mobile telecom service providers. Mobile service providers require long-term service contracts in exchange for free or deeply-discounted mobile phones.

Technology lock-in has been used by inkjet printer manufacturers with some success, although customers have complained that ink from printer cartridges can cost more than vintage champagne. Some inkjet printer makers install proprietary chips in their inkjet cartridges to ensure that customers can only purchase replacement cartridges from the company that manufactured the printers. These chips can also contain built-in expiration dates which will stop the cartridge from working, increasing aftermarket sales (but also potentially reducing product attractiveness).

Service expertise has been successfully used by car dealerships and manufacturers. Car companies provide special training and equipment to dealerships. Some vehicle malfunctions can only be diagnosed with manufacturer-provided equipment. This way the dealerships maintain their ability to provide aftermarket service to the customers they originally sold cars to.

Gillette and Schick patent their razor and blade designs to ensure third-party manufacturers can’t sell replacement blades. Since patents eventually expire, razor manufacturers need to innovate new designs and patents in order to maintain customer lock-in. This is one of the reasons for the recent feature escalation in the razor wars.

Making It Up on Volume

Aftermarket strategies are often used as part of a pricing strategy. A very simple aftermarket strategy is to deeply discount the primary product in order to entice new customers into the installed base. The idea is, even if the primary product is unprofitable, a profitable business can evolve in the long-term through aftermarket sales. Aftermarket strategies are an example of where you really can lose money on every sale and make it up on volume. Consequently, businesses with aftermarkets often compete very aggressively on price for new customers.

However, aftermarket differentiation based on price can lead to headaches later on, because differentiation based on price targets the most price-sensitive customers. Customers excited about buying a $50 inkjet printer aren’t likely to happily pay $40 for replacement inkjet cartridges six months later. This is why a cottage industry has formed around inkjet cartridge refills and customers feel cheated by paying a lot for inkjet cartridges—all for a printer that has a technology life of about three years before it gets replaced by something newer and better. Moreover, low priced primary products literally reduce switching costs, increase the ability of customers to switch out and shrinking the installed base and ruining the whole aftermarket strategy.

While pricing is one way to differentiate primary products, there are many other ways to successfully differentiate a product with an aftermarket in combination with price. For example, mobile phone service providers differentiate on quality and coverage. Similarly, jet engine makers differentiate on performance and reliability.

Aftermarket Success

What’s needed to create a successful aftermarket strategy?

  1. Your primary product should be durable. Every primary product replacement is an opportunity to lose your installed base to competitors. Providing low-cost or free primary upgrades can reduce the likelihood that customers will switch to competitors.
  2. Your aftermarket product or service cannot be a commodity. Lock customers into your aftermarket through patents, service expertise, service contracts, and technology.
  3. Your aftermarket product or service should be provided to the customer repeatedly and frequently. This way, you leverage the value of your installed base of customers.

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