How to Harvest the Break-Fix Annuity

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When capital equipment breaks down, it requires fixing. This cycle of breaking and fixing is what creates the “break-fix” annuity for capital equipment suppliers. The components of the break-fix annuity include:

  • Replacement and consumable parts
  • Software bug fixes
  • Repair and maintenance services

The break-fix portion of the aftermarket business can be summed up as all those things that your customer pays for in order to keep the system running the way you promised when you originally sold it to them. Your customers hate this. Their view is that they are paying you for your failures. As a result, they are highly motivated to reduce or avoid break-fix costs. They will:

  • Seek second-source, parts suppliers,
  • Refurbish instead of replacing parts,
  • Design and manufacture parts themselves,
  • Skip preventative maintenance,
  • Work around a failure to avoid taking the system down,
  • Service their own equipment, and
  • Negotiate parts and service pricing along with system purchases.

The Two Things Customers Value

The above behaviors tell two things about what your customer’s value when it comes to break-fix parts and services.

  1. Minimizing downtime
  2. Lowering repair costs

To secure your break-fix annuity you need to be your customer’s best option for delivering on these two value drivers.

Let’s try an example. Suppose you supply a certain type of manufacturing equipment that uses a valve to control the process it performs. This valve is a high-wear, high-cost item that requires replacement every three months. It sounds like a perfect break-fix annuity opportunity. Except that your customer doesn’t have to buy this valve from you. It’s an off-the-shelf part available from several suppliers.

So, you ask engineering, “Is there some way to force customers to buy this valve from us?” Engineering answers the call and delivers. They design and patent an adapter that sits between the valve and your equipment. On the valve side, the adaptor is welded. On the equipment side, the adapter attaches with a clever twist-lock connector.

You’re thrilled. Only valves with this welded adapter will fit your machine. Your patent ensures that the welded-adapter valve is only available from you. It appears that you have locked in your valve-related, break-fix annuity.

But what you have done amounts to protectionism. Your adapter did not create any new value for the customer. All your proprietary adapter does is force the customer to buy an otherwise readily available part from you, probably at a higher price. Customers will rightfully rebel. You can expect them to

  • Figure out how to work around your patent,
  • Ignore your patent, gambling that you won’t sue your customer,
  • Withhold new equipment orders, payments, references, etc. until you stop the extortion, or
  • Switch to a competitor the next time they need new equipment.

Your installed base should not be viewed as a captive market that you can force to buy from you. Nothing you do will stop your customers’ relentless pursuit of the best available solutions to reduce downtime and lower cost. You may get away with protectionist strategies in the short term, but eventually, market forces will prevail.

Instead, approach your break-fix business just as you do your equipment sales. Namely, provide more value to your customers than their alternatives. The protectionist, welded-adapter-valve strategy above did just the opposite. Contrast that with a strategy where instead engineering developed and patented a valve that lasts six months instead of three. And you priced it at one and a half times the price of the three-month valves from other suppliers. This strategy lowers customers’ downtime and costs compared to those other suppliers. As a result, you’ll secure your valve-related, break-fix annuity without harming your customer relationships or future equipment sales.

Look Beyond the Obvious Value Drivers

To further secure your break-fix annuity, look beyond the better-parts-at-a-fair-price strategy to provide value. See the list below for some other ways that you can help your customers reduce downtime and lower their cost of repairs.

  • Train technical support personnel to send customers regular updates on open issues, even when there’s no meaningful progress to report. When customers know that you haven’t forgotten them, they won’t waste time following up.
  • Sponsor a users’ group in which users can get together (virtually or physically) to share best-known methods.
  • Develop and send a regular newsletter to all your system users with tips to lower downtime and reduce costs. You can also encourage subscribers to contribute articles.
  • Include with every service call a complimentary system audit to ensure there isn’t a latent issue festering that could lead to unplanned downtime.
  • Create automatic ordering and stocking services for consumable parts.
  • Generate a formal service report for the customer every time a service is performed. Meet with the customer to review the report and ensure that she is satisfied.
  • If a service requires that defective or worn parts be returned, provide return packaging including pre-paid shipping.
  • Pre-package maintenance and repair kits including pre-sorted hardware and implementation procedures.

All of these add value, and as a result, reduces the probability that your customers will look elsewhere for their break-fix help.

Strive for Defect-Free Service

As a consumer, you’ve likely experienced how a defect-free strategy affects break-fix-services-buying behavior. It’s the primary strategy employed by new-car dealerships. If you take your car to the dealer for service, you know that you are paying a premium. But you don’t mind. You know that the technicians are highly trained. They have the right tools. They’ll inspect for other issues or recalls. They probably have any needed parts in stock. In short, they will fix your car fast and correctly every time. The repair may cost a little more, but the quick turn-around, one-attempt-and-done experience is well worth it. The confidence you have in the dealer’s ability to deliver defect-free service is why you don’t take your car to the independent garage down the street.

However, consider what you’d do if new-car dealer fails to deliver on the defect-free-service promise. You’d probably start experimenting with alternate service providers. If you fail your customers, they’ll do the same thing.

As the original equipment provider, your customers expect you to be in the best position to deliver defect-free service. Your customers depend on you to keep their systems operating so that they can keep their businesses running. They place their trust in you. Any failure on your part will break that trust. Unfortunately, there are a lot of ways to break the defect-free promise, including:

  • Defective parts
  • Wrong parts
  • Parts out of stock
  • Shipping damage
  • Parts arriving late
  • Repair or maintenance execution errors
  • Slow help-line response
  • Faulty recovery after maintenance
  • Inaccurate invoicing

You don’t want to give your customers any reason to look elsewhere for their break-fix parts and services. Therefore, you need the processes and infrastructure that will prevent failures. This can include

  • A closed-loop quality assurance process to ensure defect-free parts,
  • Extending the quality assurance process to include order processing and shipping activities,
  • Parts logistics systems that ensure that the right parts are in the right place at the right time,
  • Robust service engineer training and certification to ensure that maintenance and repair procedures are performed quickly and correctly every time,
  • Effective call center infrastructure including clear escalation procedures to ensure timely and accurate responses to customer support requests.

The secret to securing your installed base’s break-fix annuity is not that complicated. You just need to consistently deliver on your customers’ value drivers better than their alternatives. If you do, your customers will stop trying to find ways to avoid giving you their business