Data: A virtuous cycle for top-line growth

New data and better coordination can create value in the sales channel.

The CEO of an auto manufacturer was puzzled that its market share had been slipping for three years. The quality of its products was high, and it had made big strides in operational efficiency. But as one director had chided at the previous board meeting, “the sides of our sandbox are starting to pinch.”

The CEO commissioned a report on one seemingly comparable competitor whose market share and margins had been steadily increasing. He discovered that it had unusually high loyalty rates and much lower marketing expenditures. A point of leverage seemed to be the way it was accessing revenues beyond the first sale. The vehicles its customers were turning in after their leases expired, for example, held their value better than his company’s did, and these higher residuals made customers more likely to sign up for new products. Service and parts revenues were higher, too.

The CEO immediately challenged his top team to look across the value chain and duplicate what he saw as the competitor’s virtuous asset cycle. The team responded by going deeper, identifying a surprising list of data sources, many unexploited by the company. One swath related to customers. These included the prices they had paid for their current and former vehicles, the incomes and personal assets of current and would-be customers, the leasing offers they had found attractive, their responses to promotions, their preferences about product features, how they became aware of an OEM’s brand as they navigated among competing product offers, and how service agreements tended to affect repeat business. Cars and related parts created a separate and equally rich data trail, including the value of a vehicle at resale, conditions of use, maintenance history (increasingly in real time), and disposal value.

Combining data on customers and products showed the OEM where and when it could improve coordination in the channel to create and distribute economic value to its customers and dealers. That would in turn significantly boost its own revenue growth and cut its expenses. Our research and work with OEMs in diverse industries show that by rethinking their sales-channel practices, nearly all of them can increase their operating margins by 15 to 25 percent.

At issue is a strategic challenge that has in various forms tested OEMs for years, not just in autos, but also in heavy construction, medical equipment, aircraft, farm machinery, IT, and other gear with a long asset life: how to increase returns on products requiring heavy up-front investments in product development, marketing, and distribution. Thanks to a new data-enabled transparency that helps OEMs see what happens to such assets over their full working lives, across a continuum of owners, these companies can now shed new light on the behavior and economics of customers and wholesalers throughout the sales channel. Many OEMs, of course, already generate additional revenues from parts sales and service contracts. But even such companies can benefit by becoming more disciplined in their use of new data sources and by addressing tricky coordination issues across financing units and dealership networks as products travel from initial sale to resale and, ultimately, to disposal.

What’s holding OEMs back?

It’s surprising, well into the digital age, how few manufacturers respond to intensifying competitive pressures as customers steep themselves in information and become more fickle.¹ New entrants are using fresh sources of data to offer maintenance, parts, and resale services and to capture segments of the value chain for themselves. While their prospects for ultimate success may still be unclear, new business models, such as those of urban car-sharing services Zipcar and car2go, are using apps to mine alternative revenues from automobile assets. More broadly, the Internet of Things—in which sensors embedded in physical objects (such as drilling equipment, wind turbines, and automated teller machines) allow the precise metering of their use—is making possible alternative pricing strategies.

Despite these pressures, OEM channel management has remained mostly fragmented. In the continuing rush to sell new products, companies overlook opportunities to increase margins and attract new customer segments—for instance, by bundling financing and service plans. One OEM’s experience typifies how a life-cycle mind-set is missing. This OEM lacks even a centralized, shareable database of the buyers of its new or used products, let alone embedded sensors in its equipment. Sales reps have long pointed out that a customer’s size is often the determining factor in its choice of new versus used equipment, as well as the type of financing it wants or its appetite for service programs. But without the relevant information, the OEM has consistently overspent on missteps such as product promotions.

Other OEMs, meanwhile, run their financing operations as silos—like third-party banks—and therefore often leave money on the table. Take, for example, the heavy-equipment maker whose reputation for strong products is the envy of competitors. Nonetheless, its dealers often complain that they are not aware when customer leases and lending packages are winding down and that they have little time to prepare sales strategies for new purchases or to recapture used equipment for resale. Better data on the resale intentions of the customers of these distributors, something they could acquire through better coordination with the equipment maker’s finance arm, might allow them to create and offer service contracts that lock in loyalty with higher repurchase offers. When such programs are well run, according to our data, they can also increase an OEM’s sales of parts by 35 percent and nearly double margins on parts and service.

Many OEMs also fail to capture revenue from equipment and parts that can be reconditioned and cycled back into manufacturing supply chains at the end of their lives—particularly when they’ve been designed for reusability in the first place. Such practices, like those at automaker Renault, can help companies meet regulatory demands for the reuse of industrial products.²

Principles for a new operating model

Rethinking the fundamentals of sales-channel practices and organizations will take determined leadership with an appetite for cultural change. Our experience points to three areas where greater coordination and more aggressive use of information can differentiate strategy.

Managing and monitoring customers and value along the asset life cycle

More robust data can create better-defined customer segments, which OEMs can use to target activities along asset life cycles. One truck manufacturer, for instance, first divided its customers among four revenue segments. Digging more deeply into the data, it found that customers in each category had a markedly different likelihood of buying new rather than used equipment. That led them to make different financing choices—lease, loans, cash—and different demands for service agreements. The new segmentation allowed the OEM to create dozens of new combinations of offerings.

Not surprisingly, many customers base decisions about how much they are willing to pay for new equipment on what it will be worth at resale. Analyzing data on equipment use and maintenance histories provides a fact base for more accurately predicting residual values and new parameters for structuring maintenance agreements. To bolster the strength of the brand, advertising campaigns can highlight higher resale values. Furthermore, effective management of residual values should increase the flexibility of lease pricing, since less value erodes over the term of a lease, as we will see in a case study below. Higher resale values improve a dealer’s margins, and our data show that an optimal mix of new- and used-equipment sales can buffer earnings during economic down cycles. At one truck manufacturer, for instance, sales of used vehicles rose by 60 percent between 2007 and 2010, compensating for a 30 percent decline in new-vehicle sales.

Increasing the influence of finance units

Financing packages, which influence decisions at the point of sale, can streamline the customer’s purchase experience and make companies more willing to meet competing offers. Most significantly, captive finance arms, particularly those that are tightly aligned with sales and service units, are the one part of an OEM that has continuing points of contact with customers. These units can be the glue that maintains their loyalty, targeting them with new offers for equipment at key touchpoints on the decision journey and creating incentives for accelerated equipment buybacks that speed up sales cycles. Our research shows that loyalty to OEMs increases substantially when customers use a captive finance unit—70 percent of them sign up for repeat business. We have also found that well-integrated captive units contribute twice as much to operating margins as stand-alone units do.

Aligning dealers’ roles with strategy

Many customer interactions also take place at dealerships, so dealers need information and financial tools to develop a life-cycle approach. With the right information, they and the OEM have a shared view of the entire installed asset base. This shared transparency can itself improve coordination between OEMs and dealers as both look to increase margins by expanding brand reach—for example, with sales of used equipment to new customers. The promotion and management of certified-used-equipment programs increases parts and service revenues. Cross-dealer information allows OEMs to better manage inventories of new and used equipment across dealer networks, maximizing sales for both dealers and OEMs while lowering their capital costs. This approach supports higher residual values by making it less likely for equipment to end up at auction, where its resale value is typically lower.

Two case studies

Two examples—one from a carmaker, the other from a heavy-equipment OEM—show how these principles create value for all the participants in the sales channel, from the OEM down to the end user.

An automaker establishes a virtuous cycle

The management of residual values was a key element of a complete rethink of the sales-channel strategy of one automotive OEM. After initiating a certified-vehicle program with a small group of dealers, the company monitored its resale-value data closely and found that the results far exceeded expectations. It marshaled the new data and experience to expand the program rapidly across its dealer network, allowing it to build an even more comprehensive database on resale prices, vehicle use, and customer behavior.

The OEM and its dealers found that the higher-than-expected residual value gave them a significant pricing opportunity for new cars (Exhibit 1). Armed with the knowledge that resale values were averaging 60 to 65 percent of invoice prices—compared with 50 to 55 percent at competitors—the OEM and its dealers could reduce both the customers’ down payments at signing and monthly leases by as much as 10 percent. The OEM found it could actually increase list prices and still undercut competitors on total costs to customers, taking into account the higher value achieved on resale.

See Exhibit 1 and 2 here