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Warranty Cos. See Increased Demand For Service Contracts

Despite a slowdown in retail sales, extended-service plan (ESP) providers are seeing increased demand for product protection as consumers anticipate greater usage and longer ownership of their CE and appliance purchases. Below, the industry’s leading extended-warranty firms discuss the economy’s affect on attachment rates, and what they are doing to help dealers contend with these challenging times.

TWICE:How has the faltering economy affected service-plan attachment rates?

Matt Frankel, division president, AIG Warranty: Attachment rates tend to go up during hard times. Some customers are more inclined to purchase them now than during more secure times because they are uncertain of whether they will have a job and will be able to afford to repair their products down the road. Now that people are spending more time at home they are using their electronics and appliances more often and rely on them more. Whether they spent $100 or $1,000 on their purchase, they want to make sure their investment is going to be there for the long term.

Also, when there is less traffic coming into stores, sales associates have more time to spend with customers to explain the merits of extended-service plans.

Aleem Lakhani, executive VP, AMT Warranty: It’s a mixed bag. Although retail has clearly been challenged, our attachments rates have remained consistent while others’ have not. Consumers are holding onto their products longer and want to ensure their longevity, but they also need an enhanced offering. A standard extended warranty or accidental damage plan is no longer enough. Our dealers are supportive of trying products that we have optimized and new techniques and strategies that we have proposed to effectively compensate for the soft environment.

Keith Meier, extended service senior VP/general manager, Assurant Solutions: Sales of consumer electronics are undoubtedly suffering, and when price points decline, that puts added pressure on the attachment sales experience. But regardless of the state of the economy, management’s commitment to extended service programs is absolutely crucial to a program’s success. In times like these, many retailers focus on revenue-enhancing, ancillary categories and programs even more. Some Assurant Solutions retail partners who have embraced our strategic performance management (SPM) program have actually experienced an improvement in their attachment rates over the last year. Others who haven’t implemented SPM are generally seeing their attachment rates follow the trend of CE sales.

Kevin Rupkey, president/CEO, Bankers Warranty Group (BWG): We have seen some decline in extended-service plan sales for our installed base in 2008 for some product categories and anticipate that this will continue in 2009 given the economic climate. However, we have seen increased attachment rates for some retail clients in the third and fourth quarter of 2008.

Joe Romano, client development senior VP, NEW Customer Service Companies: In this type of economic climate, while we find that retail foot traffic is down, we tend to find that service-plan attach rates remain solid. Although we can’t ignore the impact of price compression and the tendency for consumers to opt for value-priced products, if you reference recessions of years past, service plans have overcome economic downturns with positive gains in attachment rate. There are several consumer and retail related factors to which we can attribute this phenomenon.

Consumers are keeping their products longer and therefore are placing a higher value on service plans during recessionary times. They are opting to spend a little more to protect themselves from additional repair costs down the road.

We cannot deny that technology has become an integral part of our lives. So despite the recession, consumers are willing to pay extra to protect their investment

With less store traffic, retailers are elevating their focus on the sale of additional services and accessory items, such as service plans, resulting in better in-store execution and higher attachment rates.

Troy Lewis, product management VP, Service Net Solutions: Clearly, the economy has affected overall CE sales in the marketplace. That in turn has resulted in lower overall volume of ESP sales in most CE categories. It is not only the volume hit but as the average selling price (ASP) on the CE marketplace is driven down by the economic conditions, it in-turn typically will lower the ASP of the service plan as well.

The good news is that we are not really seeing any decline in the true attach rate. In fact, in certain categories such as flat-panel televisions we are seeing our attach rates continue to rise. So while ESP providers and their clients may be seeing a slight reduction in the revenue of ESP sales due to volume and lower ASPs, the attach rates are still on par with normal economic times.

Michael Frosch, president, North America consumer products division, The Warranty Group: We are seeing higher attachment rates at retail because consumers are holding onto their products longer in order to get the most use out of them. With fewer units being sold, however, we need the higher rates in order to maintain sales.

Sean Hicks, president, Warrantech Consumer Product Services: CE sales have most definitely been affected by the economy, and it probably won’t get much better for a number of months. There are only so many events to drive sales, and Super Bowl was the last big sales event that will drive the television business. Pricing can only go so low before manufacturers cannot afford to produce them, and with the consumer not having ancillary income, sale opportunities will slow.

During these tight times, however, sales people have more time to spend with a customer and capitalize on selling service plans, accessories, service solutions and installs. This will improve the attachment rate as a percentage, although dollars will be down.

TWICE:How are you helping your dealer partners contend with the weak economic environment?

Hicks: By providing new service solutions, new coverages, and helping the distributors and dealers understand the service contract business better, and how to apply it to their own businesses. We have been spending more time training the stores and providing additional Webinar training opportunities to ensure that dealers have the tools they need to capitalize on the opportunities they do have. Warrantech is constantly evaluating and introducing programs that give the dealer the right programs and their customers the best value.

Frosch: There’s been a flight to quality in this economic environment, and retailers, manufacturers and consumers want to know that you’ll be there five years from now. Retailers are starting to question who is backing this promise to their customers, and they want to make sure that the highest quality of customer service and care will be provided now and five years from now, and that the claim is going to be paid. We are in truly unprecedented times, and the first thing retailers and manufactures ask for now is a copy of your financials, because they want to know what’s backing the program.

Our division has $5.5 billion in assets, we have the reserves, and our “excellent” rating was recently affirmed by A.M. Best. We’re our own administrator, obligor and underwriter, and we’ve been doing this for 45 years. We’re a global company, and we’re leveraging our diversity of products to provide retailers and manufacturers with additional categories beyond break-fix such as theft coverage, satisfaction insurance and I.D. theft, while also offering alternative structures like captive re-insurance. True innovation has to come from companies that can offer an end-to-end solution.

Lewis: The only real shift we have seen with the economic pressures and the dropping ASPs is a need in some cases to get back to basics on the ESP features, meaning providing the base coverages and no more bells and whistles to keep the price of the ESP in line with the pricing of the CE product. Additionally, we are driving more and more relevant “on-demand” premium services that are available a la carte for customers who do not have an ESP. These customers can purchase SKU-ed on-site and remote services as needed, increasing customer retention and driving additional revenues for our clients.

Romano: We firmly believe that keeping in lock-step with our retail partners and evaluating the performance of each service plan program is key to driving service-plan sales. Part of this evaluation is taking a fresh look at the retailers’ landscape as it pertains to service plans. This involves knowing the current state of the retailer, keeping a pulse on their eligible products, introducing coverage on new products and making sure service plan price points are attractive to the customer. Secondly, with the tremendous amount of cutbacks in the retail workforce, it’s more important than ever to focus in the area of training.

NEW delivers creative training tools and resources to our partners so they are equipped with the knowledge they need to sell not just the extended warranty but the product and the needed accessories. And we do it in a way that requires minimal training time of the sales associates. Lastly, and most importantly, our focus continues to be on the customer and the delivery of exceptional customer care.

Rupkey: We have proactively worked with our clients to ensure increased focus on service plan sales by delivering more training and support to their floor sales associates. Our retail clients realize that the focus on extended-service plan sales is more important than ever given the current economic environment. Our mutual goal is to provide them more resources to help increase attachment rates on each and every product sale. This will be achieved through increased on-site sales trainings and in-store support.

In addition we plan on delivering enhanced features and benefits that make the service plan more appealing to consumers, and other support services to help create more revenue opportunities for our clients. Also, we will be launching new products and services targeting the small- to medium-size business segment. Despite the economic impact on this segment, our research indicates that this channel continues to be underserved by the current offerings, and we will begin delivering some of these new products and services in 2009.

Meier: The diversification of our service-plan business has certainly helped during this economic downturn. We completed two significant acquisitions last fall — GE Warranty Management Group and Signal Holdings — which positioned us for growth in home appliances and wireless, two important markets. Meanwhile, Whirlpool selected us as their exclusive extended-service plan provider in the U.S. and Canada, providing a clear leadership position in the important OEM appliance market. This activity has helped to offset the challenging retail marketplace.

Lakhani: We’re seeing a new openness on the part of retailers to try new things and are gaining more access to their customers, which gives us more opportunities to be creative. In this environment it’s all about being different and not just offering the same cookie-cutter approach.

Among our latest innovations is a second-generation of our Protect-It extended-service plan point-of-purchase cards that feature all price tiers on a single hang tag, significantly reducing the number of SKUs that retailers need to carry. We’re also providing more marketing collateral including tent cards, stickers and shelf-talkers and are making more investments in digital signage to create more visibility on the store floor. And we continue to update our on-site and online training programs for sales associates and management based on sales data and feedback from customers and store employees.

Going forward we are piloting additional test programs and will continue to innovate, tweak and track the results.

Frankel: AIG has always helped retailers sell and explain the merits of purchasing extended-service plans, and our sales training has always emphasized the financial integrity of the contracts that we insure. With all of the negative economic news and consumer uncertainty out there, including the liquidations of Circuit City and Tweeter, it is more important than ever for the consumer to understand that we have the reserves and will stand behind their contracts.