Why Machine Builders Sell Services

May 9, 2008
Comparing Product Sales to Services from a Machine Builder’s Perspective
By Dan Hebert, PE, Senior Technical Editor

Machine builders mostly sell products, but they like services because they carry higher margins. System integrators mostly sell services, but they like product sales because they generate a steadier revenue stream.

Last month’s Machine Builder Mojo and OEM Insight columns focused on system integrators that sell mostly services to machine builders. We looked at how many of these system integrators also garner some of their revenue from product sales.

This time, we’ll compare product sales to services from a machine builder’s perspective. We’ll look at how and why a machine builder can create service revenue to supplement its main line of business, which is selling machines.

Machine builders must provide some services for installation, start-up and support. Handled correctly, services can be an important revenue source and can carry much higher margins than product sales can.

Machines are discrete, standard items. Customization can be required, but in general they’re standard items modified as needed per customer requirements.

Services are sold as fixed-price projects or on a time-and-material basis. Fixed-price projects are customized for each client, which can be risky, but they can yield very high margins. Services sold on a time-and-material basis are standardized, have low risk and return lower margins.

Because a machine builder’s products are somewhat standard, there generally are multiple competitors. This lets customers compare prices and potentially drive down profit margins.

Many machine builders see services as a counter to low machine sale margins. The most common service sold by machine builders is after-sales support.

After-sales support used to be simple. A machine was guaranteed for about a year, and during this period the service and support were free. After a year, customers were charged on a time-and-material basis. This arrangement could put machine builders and customers at cross purposes. Machine failures after warranty expiration means additional costs to customers but is a profit center for the builders.

Many machine builders and their customers now execute service agreements that consist of fixed periodic payments from customers to machine builder. The builders like these agreements because they create a fixed source of income that often carries higher margins than machine sales.

The machine users like the cash flow predictability and absence of major repair bills. They also like the alignment of interests inherent to these agreements. Unlike service-on-demand, service contracts naturally drive machine builders to monitor and maintain their machines in a cost-efficient manner that minimizes repairs and downtime.

Taken further, some machine builders lease their machines and are paid based on machine uptime and product throughput. Lease agreements convert product sales into service income. This makes revenue streams more predictable and can often increase margins.

Many machine builders provide services to their customers in the form of integrated systems, especially in the packaging industry. The OEM Insight column on page 66 this month is a good example of that.

Most packaging OEMs don’t build all the machines required for a complete packaging line, so customers turn to multiple builders or buy an integrated system from one source.

When end users need to integrate multiple machines into an operating whole, the best candidate often is one of the packaging machine builders. As with service agreements, these integration contracts can be higher margin than machine sales. But, the risk often is greater as the customer expects the machine builder to take responsibility for the operation of some if not all of the packaging line.

Revenue from these custom projects can be very high as compared to the sale of a single machine. For a packaging line, a machine builder not only sells and installs its equipment, but also installs and integrates the mechanicals and automation of the other machines in the packaging line.

These projects sometimes grow into complete turnkey systems that include facility improvements to accommodate the new line, system performance guarantees and service contracts. Every additional component of a turnkey system adds revenue, increases risk but puts the machine builder closer to the customer.

Read Integration Nation and see how Schenck AccuRate builds feeders that work with larger systems.

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