High-End Or Low, Consumers Want Warranty Plans

Extended service contracts are selling well now and are expecting to enjoy a strong year, as demand for both low-end and upscale digital consumer electronics products continue to grow. That's the assessment of several leading suppliers as they look back at the recently completed holiday season and look at the market for the New Year.

Not only are consumers ready, willing and able to spend top dollar for digital flat-screen HDTVs of all types, they are equally committed to spending an extra $200 or $300 to protect that investment. And that willingness to spend money on warranties is extending to digital cameras, laptop computers and even inexpensive replacement contracts for the now-legendary $29.95 and $39.95 DVD players.

"Retail sales have started off strong this year," said Matt Frankel, VP of AIG Warranty. "Consumer have disposable cash and are going to use it to buy flat screen TVs, digital cameras, digital camcorders and laptop PCs."

Danny Hourigan, president of the Service Plan Division of NEW Customer Service Companies, added, "Consumers are buying multiple components, such as digital TV, surround sound and DVD players, which all increase dollar volume sales and [warranty] attachment rates."

Brett Lassig, VAC Service's executive VP, noted that consumer electronics is still benefiting from the general improvement in the economy and general pullback in travel. "They are putting that money into home improvement. These trends benefit CE as consumers get back to 'cocooning' with a focus on the latest in electronics to make home life more exciting."

While retailers are enjoying greater demand for digital CE products, and higher margins than with the analog products of several years ago, there are concerns. Paul Swenson, VP of the Aon Warranty Group and president of Aon Innovative Solutions, pointed out that with flat screen TVs there are "more players now [and] more manufacturers hurt prices and margins for traditional CE retailers. A year ago digital TVs had profit margins of 30 to 32 percent. Now the margins are in the low 20s."

But Swenson noted that part of the responsibility of warranty providers is "to come up with non-traditional plans that will help our existing retailers as well as find new customers outside of our traditional electronics/appliance area."

Jeff Oldenburg, marketing and business development VP of Service Net, pointed out "The entrance of large PC OEMs and resellers into the CE space will put even more pressure on product margins. The good news is that these high-tech products are much more likely to attract interest in some sort of extended coverage protection plan."

AIG's Frankel issued a reminder about the legacy of the CE industry. "Consumer electronics is the only business in which prices go down over time." He noted that during the past four or five years "replacement plans were developed for products that hover around the magic $200 price point. They are uneconomical to fix, so these replacement plans are good for everyone — retailers, manufacturers and consumers, who get the instant gratification of a new product."

Kevin Ruppelt, GM of GE Warranty Management, said that his company's results have shown, "Service contract attachment rates continue to be high on premium CE products. [But] as product prices continue to decline we've seen a switch from 'break/fix' contracts to replacement plans." And GE has recently introduced an improved turnkey replacement plan "which reduces product returns for our retailers by providing for the replacement directly to consumers."

Warranty companies have had to be innovative to change along with the new products and technologies that have reached the market in recent years. For instance, Linda Gottschalk, marketing VP for Warranty Corp. of America, noted that the company began to rollout in December "Digital Lifeline" and "Mobile Lifeline" warranties.

"With our Lifeline products there is a level of assistance and security with the programs. For instance, if you have a laptop or PDA and you have a problem, you can go online and probably do the software 'fix' yourself," Gottschalk said. And if such products are lost or stolen they are "pre-registered, so if that happens someone can't get access to your data, due to coding we put in the system."

Michael Costanza, executive VP of Warranty Corp. of America, commented that pricing trends for CE products are benefiting the warranty business. "We have designed plans for both ends of the market. While the low end is strictly a replacement plan, with flat screen TVs retailers ask consumers, 'Don't you think you should spend an extra $300 to protect your investment?' And they are."

He added, "Even with lower prices for high end goods, and with replacement plans for low end goods, the excitement of the [new] technology has had a positive impact on attachment rates."

But who at retail is asking the question about buying warranties? That question has been hotly debated in the past year since Circuit City dropped its commissioned salespeople and went with salaried sales employees, like Best Buy, office superstores and many mass merchants.

Frank Ferrara, marketing & ESC development VP for the Assurant Group, which is affiliated with GE, commented, "Retailers utilizing noncommissioned [sales] staffs have organized training at the point of sale to enhance extended service contract sales. We continue to work with our retail clients to help educate, train and created increased visibility of the extended service products in their stores and online."

VAC's Lassig noted, "If retail management makes it clear the customer must be offered a service plan," plans are presented "and the customer does make the warranty purchase. The reality is the commissioned salesperson may push harder for sales … but overall it balances out and I don't think we see any difference in attachment rates."

Hourigan of NEW said that as retailers move "from a commissioned sales environment to a salaried sales force, they may initially see some erosion in attachment rates. However, any decline in service plan sales can be overcome." He agreed that "regardless of compensation structure" a service plan program at retail "can be successful … as long as every customer is offered the opportunity to buy a plan."