Multiple forces—accelerated by the COVID-19 pandemic—are reshaping the market for off-highway equipment (which includes mobile construction, agriculture, and mining machinery along with outdoor power equipment) for dealers. Customer expectations for convenience, digital engagement, sustainable offerings, and aftermarket services are rising rapidly. OEMs are expanding their traditional sales models to target new revenue sources and are generating substantially more data and insights from connected equipment than in the past. These shifts have significant implications for the future of dealership sales and service.
Looking ahead, dealers are expected to remain integral to OEM go-to-market and service offerings, but it will be critical for dealers to build new capabilities and support the transition to modern, effective customer service (such as digital sales and service transactions) and new equipment offerings (such as electrified equipment). While dealers have a clear vision of the future and are excited about developing opportunities, they are less certain about how to achieve the vision and how the broader digital ecosystem of engagement among OEMs, dealers, and customers will develop. As they chart their courses, dealers can look for guidance from industries such as automotive and commercial trucking that are undergoing similar shifts but are further along on the digitalization journey. With proper planning, execution, and confidence regarding their ability to disrupt themselves and effectively collaborate as ecosystem partners, dealers could develop significant, long-term strategic advantages.
To better understand the changes that dealership owners and executives anticipate, McKinsey and Associated Equipment Distributors (AED)
conducted a survey in late 2021. This article presents the key findings of the survey and offers recommendations about how dealers can unlock value and effectively compete in the evolving dealership environment.
With proper planning, execution, and confidence regarding their ability to disrupt themselves and effectively collaborate as ecosystem partners, dealers could develop significant, long-term strategic advantages.
The future of sales
Even as off-highway-equipment dealers continue to grapple with challenging market dynamics—including the unresolved COVID-19 pandemic, ongoing supply chain disruptions, and inflationary pressure—they must simultaneously address underlying structural changes in the industry that pose a potential threat to their business models. Their biggest concern is growing interest by OEMs in direct-to-consumer sales models akin to those that are gaining momentum in the automotive industry. More than 40 percent of survey respondents think it is very likely or somewhat likely that the OEM(s) they represent will implement a direct-to-consumer model within five years (Exhibit 1).
At the same time, dealers have their own aspirations for the future of sales, such as delivering more convenience and higher economic value to their customers. To achieve these goals, dealers will need to take the following actions:
- create a seamless sales journey
- optimize customer economics
- unlock value from data and analytics
- become a value-added customer platform
- pursue new opportunities in electrification
Create a seamless sales journey
Supporting end-to-end digital sales will be critical to dealers’ efforts; survey respondents expect fully digital sales (including the actual purchase) for new equipment to increase from 7 percent to 29 percent and digital rentals to increase from 7 percent to 33 percent within five years (Exhibit 2).
The industry can learn from recent developments in the automotive industry, where digital ecosystems offer an omnichannel experience that supports all stages of the car ownership journey. What distinguishes this experience is that the customer can move seamlessly among different steps along the journey. For example, a customer who initiates contact online may subsequently continue the journey in the dealership. Central to the experience is the concept of a “virtual garage,” an online platform where customers can do everything from scheduling service and updating their insurance to renting or trading in a car.
Equipment dealers can replicate this experience by digitalizing the end-to-end journey, including discovery, purchase, financing, delivery, and service. An improved experience will create stickiness that allows dealers to own customer relationships—with the initial owners and with subsequent owners of resold assets—throughout the life cycle of the machine. To realize this vision, dealers will need to ensure that customer communications provide the right message at the right time through the right channel, and that customer needs are consistently and seamlessly met at every stage of the journey. For example, customer preferences on previous purchases, such as finance terms or warranty packages, can be automatically applied to future purchases, or dealers can identify potential customer churn based on current and past purchasing patterns and reach out proactively. As a result, customers experience a purchasing or service journey that is tailored to their specific needs, rather than a generic journey.
Notably, despite anticipating a substantial increase in fully digital sales, only 14 percent of respondents listed digital sales among their biggest opportunities in the future of selling, likely because they are still grappling with that new model and see other opportunities as more lucrative in the near term.
Optimize customer economics
Meanwhile, new dealership revenue models can help improve customer economics. Fifty-three percent of dealers expect that these new revenue models in rental and fleet represent a big opportunity (Exhibit 3). Dealers need to embrace a mindset that prioritizes total cost of ownership (TCO) for customers. They also need to implement strategies to help customers buy new equipment at a lower cost, maximize resale value, and minimize equipment downtime.
Rental and rent-to-own solutions are an increasingly important dealership strategy for helping customers reduce capital expenditures and reliably secure access to higher-quality, more diverse equipment without concern for service and maintenance. Rentals also provide financial stability by reducing capital expenditure investments during tough financial periods and insulating operators from the effects of economic swings. The American Rental Association (ARA) forecasts the overall rental market to grow from about $39 billion in 2022 to about $60 billion by 2025.
To meet customers’ growing expectations for flexible access to equipment, dealers need to invest in fleets that match customer needs and in seamless, digitalized sales to facilitate the rental process. They also have an opportunity to set up revenue-generating fleet management services to help customers maximize fleet utilization and better understand equipment usage and costs. For example, using connected equipment data, the dealer can let the customer know where assets are located, whether they are being used or sitting idle, and how much fuel they are consuming.
Unlock value from data and analytics
More than half (56 percent) of survey respondents identified analytics use cases as a major source of selling opportunity. Sales-focused analytics will be fueled by an influx of data from connected equipment—95 percent of respondents consider connected equipment a positive trend—and they will create value from enhanced customer relationship management (CRM) and sales data on customers as the journey digitalizes. Dealers can tailor their activities during the purchasing journey—for example, by recommending attachments and accessories based on similar customers, by integrating warranty packages, or by reaching out to customers who are likely to buy.
Dealers at the forefront of using analytics have already begun to create value in several areas:
- Dynamic pricing for used equipment. Dealers can set prices for used equipment at the local level based on daily insights on competitive inventory (gleaned from competitors’ websites using web-scraping tools), customer interest in specific equipment (based on website views), and historic price elasticity. When done right, dynamic pricing can boost margins and reduce the number of days on lot for used equipment.
- Lead enrichment. Dealers can improve lead quality and conversion rates by using data and analytics to segment and qualify customers. They can also use these tools to customize sales journeys to particular communication preferences and customer needs—for example, customer sales history and historic behavior within the customer segment.
- Enhanced upselling enhancements. Based on usage patterns determined from connected equipment, dealers can offer equipment that’s tailored to customer needs (for example, specific attachments based on the work the customer performs).
- Analysis of usage patterns. This analysis can also determine when customers are most likely to purchase new equipment.
Become a value-added customer platform
Dealers can use their extensive knowledge and networks to increase their engagement with customers and act as advisers. They can stimulate interactions among customers—for example, by hosting quarterly equipment forums—and provide deep content knowledge to customers on topics of interest such as equipment electrification, used-equipment value, and the benefits of connected equipment. Dealers are optimally positioned to offer tailored advice to customers (for example, how to lower TCO) given their deep understanding of both customers and their equipment. Dealers could also create opportunities for customers and OEMs to collaborate on product development. By expanding their engagement with customers in these and other innovative ways—while also providing a seamless, digitalized journey—dealers can maintain their relevance and hold on to their customers.
Dealers can use their extensive knowledge and networks to increase their engagement with customers and act as advisers.
Pursue new opportunities in electrification
Seventy-eight percent of survey respondents said the most significant opportunity presented by the energy transition is the chance to sell new products and services for electrified equipment. These products and services may include charging infrastructure, battery services, battery recycling, and even advice to help customers understand government regulations and incentives. Dealers have a unique opportunity to support their customers in this transition. They are well positioned to educate customers on the economic benefits—for example, lower cost of ownership despite higher up-front costs—and can help customers implement the charging infrastructure that best matches their operating model.
The future of service
Traditionally, dealers have operated their service organizations in reactive fashion, with equipment service triggered by customer requests. Going forward, dealers have opportunities to integrate more directly into customer operations and help them maximize productivity and efficiency by increasing equipment uptime. Sixty-four percent of dealers consider enabling this better customer service experience to be the top opportunity in the future of service.
To enable this future state, dealers can leverage connected equipment to perform maintenance as needed and design a digital service journey with seamless scheduling, payments, and equipment status updates. Dealers expect a fivefold increase in online service appointments (up to 31 percent of total appointments) within five years. This trend will continue to increase as the share of connected equipment grows.
Dealers and operators in commercial trucking and other industries in which reducing asset downtime is a critical objective have begun offering guaranteed uptime to their customers, including large fleet operators. Trucking companies have achieved this by moving from unplanned to planned repairs using historic trend analysis and connected equipment, streamlining parts and technician availability through data analytics, and leveraging the scale of dealership networks to better serve customers. These efforts have led not only to increased aftermarket service and parts revenue but also to increased new equipment sales because of an improved customer experience, according to McKinsey analysis.
Off-highway-equipment dealers can similarly streamline their back-end operations with investments in data and analytics. Seventy-four percent of dealers expect the ability to predict what parts they will need and inventory forecasting to be the primary uses cases for analytics in service. For example, dealers can optimize their parts inventory by analyzing historic demand patterns based on factors such as the time of year or the weather. Dealers can also anticipate demand by monitoring market developments. A region that has recently approved fiber-optic internet, for example, may see a spike in demand for certain parts.
Additionally, dealers can employ analytics to improve the efficiency of technicians and tech deployment in the field. For example, by leveraging connected equipment data, field technicians can arrive to calls with the parts and tools they need to provide the necessary service.
Digitalized dealers can also leverage technology to identify opportunities to provide customers with more clarity on additional service needs. For example, by capturing pictures and videos during the inspection process, technicians can communicate more effectively with customers about the state of their equipment, including any additional needs, and notify the sales team about opportunities to offer customers additional services.
From vision to reality
To continue to thrive in this new environment, dealers must invest now to build the sales and service organizations they will need to operate as digitalized, customer-centric businesses. This includes investments in new talent—for example, setting up analytics organizations and digital capabilities such as e-commerce platforms. Dealers will need to balance this with the need to manage near-term shortages in talent—such as diesel technicians—by hiring from parallel industries or by tapping formerly retired technicians.
Dealers also need to establish partnerships with OEMs, which stand to gain much by bolstering support for dealers. Seventy-two percent of respondents to our dealership survey reported receiving no or very limited support from the OEMs they carry, while 71 percent would like to see OEMs standardize digital solutions to support sales. For example, OEMs in the automotive industry collaborate with the dealer network to provide or certify digital sales solutions that can be integrated into existing dealer management software. This is especially helpful for small or medium-size dealers that do not have the capabilities in house to create their own front and back ends for digital sales. OEM support can help accelerate the digitalization of the sales journey by providing dealers with solutions that are easy to implement and use.
Finally, dealers must commit to a bias for action. More than half (57 percent) of survey respondents said they have made no or minimal progress on building the sales and service model of the future. These respondents are missing out on both near-term value and long-term strategic advantages.
The landscape for dealers is rapidly changing, and new opportunities are emerging. Looking ahead, dealers plan to offer a digitalized, omnichannel experience that seamlessly serves end-to-end customer life cycle needs. To achieve this vision, dealers need to have the confidence to disrupt themselves. Now is the time to define opportunities to better serve customers, develop competitive differentiators, and translate these into strategic initiatives such as analytics use cases, lead enrichment, and digital-sales front ends. Additionally, dealers can seek to create an ecosystem of partners for long-term advantage.
Other industries, such as automotive and commercial trucking, have already embarked on this journey and have accelerated their efforts in response to the COVID-19 pandemic and the persistent changes resulting from it. In the automotive industry, these changes have also made it possible for new disruptors such as digital-marketing players and used-car disruptors to enter the market and scale. Now is the time for off-highway-equipment dealers to similarly define opportunity areas to better serve customers and develop competitive differentiators.