The Secret Life of Factory Service Centers: For a Lucrative New Source of Revenues, Profits, and Market Information, Manufacturers Need Look No Further Than Their Own Repair Shops

A few miles off Interstate 696, outside Detroit, the factory service center of a consumer goods company blends easily into the commercial landscape. The seven people who work at the customer support site sell parts, refurbished products, and accessories; repair products; and answer service and maintenance inquiries. Until recently, the manufacturer paid scant attention to this place or to its whole network of factory service centers, which were seen merely as a cost of doing business--the price a company pays to support products that eventually wear our or break. Then a new division manager discovered that despite years of neglect, the centers were earning margins upward of 20 percent, more than twice those of the core business. Now the company is planning to open centers in ten new locations across the United States and expects network-related revenue to double by mid-2003, thereby providing a full 10 percent of the revenue of the division and 15 to 20 percent of its profits. A handful of US companies have achieved similar results; with small capital investments, so could many others. (1) Factory service centers can not only generate cash but also provide a gateway to the lucrative world of services. Trucks, for example, can produce after-sales revenue equivalent to four times their purchase price through financing, insurance policies, service contracts, and the sale of parts and accessories. (2) At present, though, these high-margin items tend to be sold through third parties--dealers, retailers, and independently owned authorized service centers--which take a cut of the revenues from parts and all of the revenues from service contracts and extended warranties. Manufacturers can capture a larger share by enlarging their own service networks. Service centers also provide a valuable laboratory for developing new products and services, for providing information about customers' needs, and for showing where products have failed to meet them. One midsize industrial-products manufacturer, for example, is deciding whether to rent products, start a mobile repair service, and offer service contracts and extended warranties--all as a result of insights gleaned from the company's service network. So far, about 35 companies in the United States have created service networks (Exhibit 1), but most have yet to exploit them fully. Almost all of the businesses we looked at had fewer service centers than they should given their market size and penetration and thus were failing to maximize their revenues. Today, most service networks receive little management support. If they had more locations, a more profitable mix of services, and better management, we estimate that they could produce revenues equivalent to 20 percent of a company s core product sales. Although a few top-performing networks are on track to meet that goal, most of those in our study manage just 5 to 10 percent. To put our point another way, we estimate that service networks in only four US industries--consumer electronics, personal computers, power tools, and vacuum cleaners--could generate revenues of $6 billion to $8 billion a year from after-sales service, parts, and ancillary products. Today, we believe, only a fraction of this potentia l is being realized. Running these networks effectively certainly poses a management challenge: manufacturers must develop new skills and confront channel conflicts with dealers, distributors, and independent operators (see sidebar, "Managing channel conflict"). But well-managed service centers would more than justify the risks. The economics of service networks Consumer products selling for as little as $100 (the price point at which many dealers begin offering extended warranties) can support profitable services. Our research indicates that consumers will pay up to half the original price of a product for a given repair--enough to make most repair jobs profitable for well-managed shops. …