How industrial companies make money: equipment, aftermarket and backlog
What industrial and aerospace companies sell, to whom, why the installed base matters, and the metrics used to track orders and service.
Industry brief, with a one-minute summary: Industrial manufacturing and aerospaceKey takeaways
- An industrial company earns money twice: once when it sells a machine, and then for many years from spare parts, service, upgrades and software for that machine.
- Machinery: construction, mining and farm equipment, machine tools, pumps, compressors, packaging machines.
- Electrical and automation equipment: motors, drives, switchgear, transformers, robots, factory control systems.
- Aerospace: aircraft bodies (airframes), engines, systems such as landing gear and avionics (aircraft electronics), and maintenance, repair and overhaul (MRO).
Key idea
An industrial company earns money twice: once when it sells a machine, and then for many years from spare parts, service, upgrades and software for that machine. The machines already in use (the installed base) are often the most valuable thing the company owns.
What this group of industries sells
- Machinery: construction, mining and farm equipment, machine tools, pumps, compressors, packaging machines.
- Electrical and automation equipment: motors, drives, switchgear, transformers, robots, factory control systems.
- Aerospace: aircraft bodies (airframes), engines, systems such as landing gear and avionics (aircraft electronics), and maintenance, repair and overhaul (MRO).
- Industrial components: bearings, valves, fasteners, castings, forgings.
The customers are businesses and governments: mines, builders, utilities, factories, airlines, and defense ministries. They buy rarely, for large amounts, after long evaluations. A new machine or aircraft can work for 20 to 30 years. During that time it needs parts, repairs and upgrades, and the maker usually knows it best. This creates switching costs and a long stream of revenue.
- Lifetime revenue from one machine
- New equipment saleOne-time, competitive, often lower margin
- AftermarketRecurring for 20 years or more, usually higher margin
- Spare parts and consumables
- Service contracts and repairs
- Upgrades, retrofits and software
- Financing, rental and used equipment
| Feature | New equipment | Aftermarket (parts and service) |
|---|---|---|
| Revenue pattern | Lumpy; rises and falls with customers' investment cycles | Steady; follows how much the installed base is used |
| Competition | Tough; buyers compare several makers | Weaker; the maker knows the machine best, but independent repair shops compete |
| Typical margin | Lower | Often much higher |
| Main costs | Materials and components, assembly labor, engineering | Parts stock, field technicians, service centers |
| Aerospace example | Engines are often sold at a low margin or even a loss | Engine makers earn much of their profit from decades of maintenance and parts, often under per-flight-hour contracts |
So-what
When an industrial client wants more profit, the aftermarket is often the first place to look.
Key metrics, in plain words
- Order intake: the value (or number) of new orders signed in a period.
- Backlog (or order book): orders signed but not yet delivered. Divide by yearly deliveries to see how many years of work it holds.
- Book-to-bill: orders divided by deliveries (or revenue). Above 1 means the backlog is growing.
- Installed base: the number of the company's machines in use by customers.
- Service capture rate: the share of the installed base's parts and service spending that the maker wins, rather than independent shops.
- Overall equipment effectiveness (OEE): how much of a machine's possible good output it actually produces (lesson 2).
- On-time delivery and lead time: how reliably and how quickly the company delivers.
Airbus reported a backlog of 8,754 commercial aircraft at the end of 2025 and delivered 793 aircraft that year. At that delivery rate, how many years of production does the backlog hold? Round to two decimals.
A company has book-to-bill of 0.8 for three years in a row. What does that suggest?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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