As a retailer, you know that extended-service or warranty plans are a natural product offering for your business. They’re both comforting to consumers and profitable from a business perspective.
Indeed, the Service Contract Industry Council, a trade group, said purchases of extended warranties were up 10 percent last year. And Best Buy’s revenue from all services, including extended- service plans, represented 7 percent of its total revenue in fiscal 2009, according to a Bloomberg report.
But how much do you really know about how your warranty programs work? Who are the players involved and who’s responsible for the various elements in fulfilling the plan? What’s your return on investment? Understanding the life cycle of your warranty plans not only impacts your customers and profit margins, but also your brand.
An easy starting point is determining who the insurance company is that’s covering your plans. The insurance company, or underwriter, is the one who insures claims liabilities from the warranty contracts. It’s important to look for insurance companies that are well-managed and wellcapitalized because they are truly the foundation of your plans. This is the company that you’re building your reputation on when claims need fulfilling, even if your business fails. This is the group that needs to be trusted, vested and insured so you and your customers can have peace of mind.
Next, a service contract provider is the company that is legally and financially obligated to repair or replace the customer’s covered product. This company is your business partner. They create and administer customized extended-service plans on your behalf to meet your operations’ needs, customer expectations or product requirements, and in return, collect a fee for their services. Full disclosure of costs and margins is important because once plans are agreed upon with the service contract provider, your store is able to mark them up accordingly or offer them to consumers at recommended retail prices.
If you’re not sure what you’re paying for, you have every right to ask your service contract provider a few questions to level-set the playing field:
How is your cost divided between insurance and administration?
What is each entity’s profit margin?
What is the program loss ratio, both overall and by product? If your loss ratio is very low it should give you the opportunity to lower prices to sell more extended-service plans, be more competitive, or collect more profits and put them in your pocket.
Am I going to receive all the information I need on a regular basis to ensure I am getting the best price and product compared to the market?
Do you participate in a profit sharing program with your insurer?
Is my program compliant to protect my company’s brand reputation? Have all statutory compliance and filings been addressed?
The service contract provider and warranty administrator (or third-party administrator) are usually the same organization. As a customer- facing group, it’s critically important that your store has access to a contact person and your customers find it easy to work with this organization. They are also responsible for training your sales representatives on the ins and outs of selling warranty plans and how to facilitate a claim. Administrators also contract with repair facilities to repair or replace covered products, so easy access and open lines of communication are essential in this relationship to ensure the parties involved — you and your customers — get what they’re paying for. Since you’re paying the administrator a fee, you want to align yourself with well-respected companies that work hard to earn trust and deliver on expectations — for your store and your customers. Keeping the administration and underwriting under one umbrella can provide a hassle-free arrangement that ensures warranty plans deliver positive results for customers throughout the life of the plans.
While creating an effective warranty program certainly takes a little work, becoming educated about the process and asking the right questions to ensure you’re partnering with the right service contract provider is critical to the success of your business. Knowing who the extendedwarranty players are and how they impact your business can mean the difference between profit and loss of earnings, sales and customers.
Bruce Saulnier is president of AMT Warranty and Warrantech, and is a vice president of parent company AmTrust. For more information, visit