Aftermarket services are an IoT opportunity

As the Internet of Things (IoT) continues to grow, aftermarket services for IoT-connected products are becoming an attractive opportunity for innovators and investors. 2018 is sure to see new business models emerge to create value from the estimated 15 billion "smart" devices connected to the IoT, from computer chips to industrial machines to medical devices to entire environments.

One of these promising business models is data analytics services that optimize the performance, availability and security of IoT-connected products. These solutions are attractive to IT Services companies because they are typically differentiated, high margin and recurring, secured by long-term contracts. Using remote monitoring and connectivity tools, service providers generate product performance metrics and, for example, spot the need for preventive maintenance and upgrades.

Opportunities for such aftermarket services can be found in many industries including power, transportation, construction, agriculture, oil and gas and healthcare. An example from the B2C world is the emerging niche in specialized weight sensors designed to measure usage from dispensing equipment like beer kegs. Beer distributors are starting to offer services that help restaurant owners track and benchmark their waste and shrinkage (some bar keepers can be quite thirsty!).  This process can also identify which beers are selling well, in real time.

Aftermarket services often generate higher margins than sales of new equipment. One analysis done across 30 industries showed that average profit margins were 25 percent, compared to 10 percent for new equipment. But creating profitable aftermarket services around IoT-enabled products requires more than simply installing IoT sensors and monitoring the data. To make themselves successful aftermarket services providers, manufacturing and traditional “break fix” companies will need to automate processes such as asset diagnostics, service order management, routing/scheduling and parts planning. They will need dedicated resources, including possibly adding a Chief Services Officer (CSO) to their leadership team.

It remains to be seen whether the winners in aftermarket services will be industrial Original Equipment Manufacturers (OEMs) that have channel partnerships and are positioned to capture operating data from their installed base. Or the winners may be third-party parts manufacturers and independent contractors that are more grounded in services. Many manufacturers still focus mainly on the design and production of their physical products, not on the software their equipment runs on. And it’s software that is the key to post-sale services. Many of these manufacturers don’t yet understand that offering aftermarket analytics is a way to get insights into customer needs.

Any way you look at it, the view of aftermarket services as a “low margin maintenance” business is completely out-of-date. Any IoT-connected product is in effect a service, and therefore a source of incremental revenue from existing and new customers. What’s changed? The powerful new world of IoT has arrived.  Aftermarket is just another example of the limitless potential it offers for business innovation.