How to Sell Services More Profitably in Manufacturing

Welcome to our comprehensive guide on “How to Sell Services More Profitably in Manufacturing” or if you would like to get more prescriptive about it “Measuring Service Offering Profitability (SOP) and Improving It” in the manufacturing industry. As a manufacturing business owner, you know that services can be a significant revenue driver, but ensuring their profitability by finding suitable and accurate methods to measure them can often be a complex challenge. 

For more than a decade, Pricefx has partnered with countless manufacturing businesses worldwide, empowering them to boost profitability and optimize efficiencies. Our innovative technology enables manufacturing companies just like yours to effortlessly organize, monitor, and measure your SOP in as close to real-time as possible, responding promptly to dynamic sales, uncertain and rapidly shifting market conditions, and product attributes.  

 In this article, we will delve into the art of measuring SOP and explore effective strategies to optimize your pricing and value management. Whether you are looking to boost profits, uncover hidden revenue potential, or refine your pricing approach, we have got you covered. Let’s embark on a journey to elevate your service profitability and uncover ways to help your manufacturing business thrive! 

What is Service Offering Profitability (SOP)? – The Definition 

Service Offering Profitability (SOP) encompasses the crucial practice of measuring the profitability of services provided by companies, particularly within the manufacturing industry. These services are offered alongside the products they manufacture, catering to customers’ needs and enhancing their overall experience. While not all manufacturing companies offer services, those who do understand the significance of these additional offerings in building lasting customer relationships and adding value to their products. 

For instance, let’s take a closer look at some examples in the aerospace industry, such as manufacturers of cutting-edge jet engines for airplanes. After selling these engines to customers, they realize the importance of providing maintenance services to ensure the engines operate smoothly and reliably. This type of service program (focused on maintenance and repair services), also known as MSP, allows companies in any manufacturing industry to keep track of usage of their products (in the case of aerospace applications these programs track flight hours and cycles of the engines mounted on the airplane). Based on this data, customers are charged for the service, promoting a proactive approach to the care of their products. 

The aim of SOP for companies is to assess the profitability of their programs that care for the continued operation of the products for their customers and other related services. They want to determine if the revenue generated from these services outweighs the costs associated with providing them. By understanding the financial impact of their services, these companies can make informed decisions to optimize their pricing strategies, enhance service offerings, and ultimately, bolster their bottom line. 

While the example above centers on aerospace industry MSP, it is essential to recognize that SOP encompasses a range of services beyond maintenance. These may include technical support, training, spare parts sales, and more, depending on the company’s offerings. Analyzing the profitability of each service offering helps manufacturers like ABC Aviation align their business goals with customer needs and drive growth through value-driven strategies. By conducting a detailed assessment of SOP, companies can fine-tune their service offerings, deliver exceptional customer experiences, and secure a competitive edge in the manufacturing landscape. In the next section, we will explore how businesses can effectively measure and improve service offering profitability to thrive in their industry. 

Why Measuring SOP is Important 

The importance of measuring Service Offering Profitability (SOP) becomes evident when examining how it impacts various aspects of a company’s operations. Heading back to the aerospace manufacturing example, they sell engines to customers and provide a maintenance service program to ensure the engines remain in optimal condition. 

The maintenance program is a value-added service for aerospace customers, as it minimizes the risk of jet engine failures and associated costs. Customers are charged based on the number of flight hours and cycles, aligning the payment with the usage of the engine. Companies invest in offering these maintenance services, including providing free repairs when needed. This program’s profitability is crucial for aerospace manufacturers to understand how it affects other aspects of their businesses. For instance, when a component in the engine requires replacement, companies may use a new product from their inventory to carry out the repair at no additional cost to the customer.  

While this benefits the customer, it becomes part of the program’s cost for the manufacturer.

Measuring SOP allows aerospace manufacturers to assess whether their program’s profitability is sustainable and does not adversely affect other product sales. 

For instance, sometimes the component used in the program is also sold to other customers who are not part of the maintenance program.

 

If the cost of the program impacts the pricing of this component to other customers, it could affect the profitability of overall product sales.

 

Therefore, SOP evaluation goes beyond assessing the individual program’s profitability and delves into understanding how it harmonizes with other areas of the organization.

By doing so, manufacturing companies can strike the right balance between profitability, customer satisfaction, and overall business performance. 

Number One Step to Measuring SOP: Recognize That Your Manufacturing Business is also a Service Company 

Numerous manufacturing companies operating in the product domain possess the inherent capability to offer valuable services, although this potential often goes unnoticed.  

Regrettably, these companies fail to recognize the revenue opportunities that lie within their grasp – the potential to monetize the services they already provide.  

The initial stride toward enhancing their service capacity is to create awareness among both company managers and customers about the value embedded in their existing service offerings. 

Number Two: Using Data to Measure SOP 

When it comes to measuring service offering profitability, visibility into the data plays a pivotal role. With the right pricing software in place, companies can efficiently track and analyze the cost associated with each service they provide. Automation becomes a key factor in this process, streamlining the tracking of various elements that contribute to the service’s profitability.  

Utilizing key performance indicators (KPIs) is essential in evaluating the success of service offerings. KPIs such as coverage rate, indicating the percentage of engines covered by the service program, and customer retention rates for service agreements, provide valuable insights into the overall performance and effectiveness of the services being offered. 

What Are the KPIs I Can Use to Measure SOP as a Manufacturer? 

There are several KPIs and other factors that you will need to keep track of to measure your manufacturing company’s SOP; 

• Coverage Rate – The coverage rate acts as a guiding light to assess the profitability of service offerings within your manufacturing company. This metric measures the percentage of products or assets covered by service agreements. A higher coverage rate signifies not only increased customer trust and loyalty but also a substantial potential for recurring revenue, allowing your company to wield its resources more strategically and enhancing the overall profitability of your service endeavors. 

Imagine a manufacturing company specializing in medical equipment. By offering comprehensive service agreements to their clients, they ensure that 90% of their products sold are covered. This high coverage rate not only fosters strong client relationships but also guarantees a steady stream of recurring revenue. With most of their products under service contracts, the company optimizes its resource allocation, ensuring efficient maintenance and support. This contributes to elevated profitability as the company strategically aligns its services with customer needs, leading to sustainable growth and success. 

• Utilization Rate – The utilization rate evaluates the profitability of your manufacturing company’s service offerings. This metric gauges the extent to which your services are being utilized by customers against their potential capacity. A higher utilization rate indicates optimal resource allocation, effective service delivery, and a potential for increased revenue streams, all of which contribute to a healthier bottom line for your company’s service-driven profitability. 

In a manufacturing scenario, consider a company that creates industrial machinery and provides maintenance services for their products. Utilization rate, in this context, measures the ratio of actual maintenance work completed to the maximum possible work within a specific period. For instance, if this company can perform maintenance on 100 machines monthly but services 80, the utilization rate is 80%, reflecting efficient service utilization and potentially higher profitability through optimized resource allocation. 

• Renewal Percentage/Churn Rate Ratio – The Renewal Percentage, often referred to as the “Churn Rate Ratio” is a pivotal KPI in evaluating your manufacturing company’s service offering profitability. This metric gauges the percentage of customers who continue to renew service agreements versus those who choose to discontinue them. A higher renewal percentage signifies a robust customer base, highlighting customer satisfaction and sustained revenue generation, thereby enhancing the overall profitability of your service offerings. 

In addition, the below are not typically metrics to measure the profitability of service programs but can shed light on products that suffer from mediocre performance in the field and in turn impact the profitability of the program.  

Most manufacturing companies will develop their products with an estimated measure of any of the below metrics. For example. If the reality shows the products fail more often than expected, it can be a significant cause for excessive cost to the program and also to the overall reliability of the product (which in turn can negatively impact user preferences). 

• MTBR (mean time between replacements) – MTBR is usually used for non-repairable components or subsystems in a repairable system. For example, a light bulb in a machine might be scheduled for replacement after every 1000 hours of operation or replaced at failure. 
• MTBF (mean time before failure) – MTBF is a crucial KPI for assessing the profitability of your manufacturing company’s service offerings. This metric measures the average time a product or equipment can operate before experiencing a failure, helping you optimize maintenance schedules, reduce downtime, and enhance customer satisfaction, all of which contribute to improved service profitability. 
• MTTR (mean time to recovery, repair, respond, or resolve) – The MTTR metric quantifies the average time it takes to restore a product or equipment to normal functionality after a failure. A lower MTTR indicates efficient service processes, minimizing downtime for customers and boosting overall service profitability. For instance, in manufacturing, a shorter MTTR for industrial machinery breakdowns ensures swift resolutions, reduces production disruptions, and enhances customer satisfaction, ultimately contributing to improved service profitability. 
• MTTF (mean time to failure) – Closely related to MTBF, MTTF (Mean Time to Failure) serves as a crucial metric in gauging your manufacturing company’s service offering profitability. MTTF is focused on calculating the average time a system or component operates before its first failure, while MTBF considers the average time between consecutive failures in a group of components or systems. 

How KPIs & Pricing Software Work in Concert to Maximize Your SOP 

In the intricate landscape of manufacturing, where profitability hinges on precision and efficiency, a mastery of KPIs emerges as the guiding light for sustainable success. These metrics, from Renewal Percentage/Churn Rate Ratio to MTBF and MTTR, illuminate the path to optimal service profitability. Yet, true mastery lies not merely in comprehending these metrics, but in harnessing the power of data visibility and tracking enabled by modern pricing software like that of Pricefx. 

This software becomes the sorcerer’s wand that grants manufacturers the ability to conjure accurate insights from the labyrinthine data streams. Armed with the visibility to customer behaviors, maintenance cycles, and market dynamics, your company can adeptly dance between cost management and precise pricing. It is the enchanting symphony of service renewal rates meeting minimal downtime, where churn becomes a distant memory and customer satisfaction becomes the anthem. By weaving these KPIs into the tapestry of your business strategy, and wielding pricing software as your trusted ally, you emerge with the power to not only measure but shape the very profitability of your manufacturing company’s service offerings. 

To learn more about the Top 4 ways that manufacturers can benefit from the Pricefx, click on the handy article below:

Happy Pricing!