Extended-Service Upstarts Rewrite Warranty Model

By Alan Wolf -- TWICE, 7/21/2008

NEW YORK — Two separate extended-service-plan providers are revisiting the way CE and majap warranties are sold and serviced.

In the process, the companies — San Francisco-based SquareTrade and W3 Solutions, based in West Vancouver, British Columbia — are challenging the industry's established players and processes, and, in the case of SquareTrade, are even giving dealers a run for their high-margin warranty dollars.

SquareTrade actually plays on both sides of the fence, offering after-market service contracts directly to consumers via its Web site at www.squaretrade.com, but also providing its branded solution to CE retailers, which to date include Etronics.com and the online arm of New York's DataVision.

According to president/CEO Steve Abernethy, the company takes a kinder, gentler approach to extended warranties, which he argued are largely overpriced and under serviced.

For starters, SquareTrade's plans are roughly 40 percent cheaper for consumers than the going industry rate, which is generally 25 percent of the cost of the insured product. In contrast, SquareTrade charges 12 percent of the cost of a CE product priced less than $1,000, 10 percent of the cost of a CE product priced between $1,000 and $2,000, and 8 percent of the cost of a CE product priced at $2,000 or higher.

Contracts for major appliances range between 4 percent and 8 percent of the product's price.

The contracts themselves carry standard three-year terms that run concurrently with the manufacturer's warranty. The agreements do not cover loss, theft or data recovery, although consumers can purchase additional coverage for accidental damage or an extra year of protection for TVs.

The contracts are administered by SquareTrade itself and are underwritten by AmTrust Financial Services, parent of AMT Service Corp., another extended-service-plan provider.

Abernethy said he can keep the price of the contracts low by taking less margin and "engineering out a lot of costs," a benefit of a Web-based operation that allows consumers to file claims and track their warranties online, among other tools. The company also maintains its own California call center, which generally clears about 75 percent of consumer calls, he said.

When consumers do call, the average wait time is 15 seconds, and SquareTrade is "much more liberal" with its problem resolution. "Consumers won't get nickled and dimed, and there's no runaround. They will get taken care of," Abernethy pledged. SquareTrade backs that promise with a five-day service guarantee, which pays consumers the full price of their purchase if the product can't be repaired within that time frame.

The company also encourages shoppers to research their warranty purchase by providing links to consumer review sites Epinions and NexTag, where SquareTrade garnered 4.5- and five-star ratings, respectively.

"We empower consumers by approaching warranties the same way educated consumers shop for consumer electronics," Abernethy said, resulting in a five-fold increase in attachment rates and, when sold through a retail partner, engendering dealer loyalty and repeat business.

In contrast, W3 Solutions, formerly Walker Group, the Canadian service-plan provider, is spicing up the extended-warranty business through a little creative bundling. The company has teamed up with TechForward, a financial services firm for the CE industry, which has developed a high-margin add-on service that retailers can offer customers at the point-of-sale.

The product, Guaranteed Buyback, allows consumers to sell their used CE devices for a guaranteed price based on product, brand, model and age. Shoppers pay a sliding scale fee for the guarantee when the product is purchased, and are compensated after shipping it to TechForward, which provides free boxes and freight.

The used product is then refurbished or recycled, which helps the environment, while the consumer is inclined to make an upgraded replacement purchase, which helps the retailer.

The service was introduced last January at International CES 2008 as an adjunct to retail sales, and was bundled into W3's service plans in June.

"We are dedicated to working with TechForward to deliver the next generation of add-on services for consumer electronics," said Scott Walker, president/CEO of W3. "Bundling Guaranteed Buyback plans with our extended warranties will substantially increase attach rates by attracting customers who want the flexibility to upgrade their devices within a couple years of their purchase."

The option is especially pertinent within the consumer electronics category, where product upgrades and new technologies are introduced more rapidly, and product obsolescence occurs more often, than in other product sectors.