Best Practices in Marketing and Selling Extended Warranties
No one can dispute the fact that manufactures are placing increased attention on growing top line service revenue. Typically, this revenue is captured through the sale of Extended-Warranty/Extended-Service (EW/ES) programs. Given the level of focus place on this subject by manufacturers and service providers, Blumberg Advisory Group and Giuntini and Company partnered to conduct a study among professionals involved in selling EW/ES programs. To qualify as a survey participants, respondents had to influence, recommend or make decisions about these programs. The objective in conducting the survey was twofold: To identify best practices involved in marketing and selling EW/ES programs and to evaluate the impact of these practices on Key Performance Indicators (KPIs).
Attachments and Renewal Rates
Attachment and Renewal rates are KPIs that measure how successful a company is in marketing and selling EW/ES programs. Ideally, a company would want to achieve an attachment rate of 50% or higher and renewal rates of 75% or better. This is considered best in class performance. Only a small percentage of companies have been able to achieve these targets.
Key findings from Blumberg and Giuntini’s recent survey on EW/ES benchmarks and best practices indicate that only 30% of companies have achieved attachment rates of 50% or more. In fact, 16.7% have achieved attachment rates of 70% or better. While the majority (59.5%) of companies experience renewal rates of 75% or more, only 22.5% have achieved renewal rates greater than 90%.
There are several best practices that companies can pursue to achieve best in class performance on KPIs related to marketing and selling EW/ES programs. Most significantly, the program configuration plays a critical role in influencing attachment and renewal rates. The truth is that customers will purchase these programs if they feel that they will effectively meet their needs. That is why it is important to specify what is included in the program from the perspective of features, resources, and coverage.
Configuration refers to the length of coverage, level of customization, processes engaged and resources employed in delivering the services, and entitlement levels offered. The survey results suggest that the more distinctions a company can make about its EW/ES program, the more likely customers will be to purchase it. In other words, customers consider the value of a service contract before they purchase it. This is an “eye-opener” because many companies have the view that a warranty is a warranty. The leadership within these companies believes that just because customers purchase their product they’ll also purchase the EW/ES.
It important to include both basic and value-added services as part of the program. The more extensive and focused the services, the more likely the customers will be to buy.
Nearly all of the companies surveyed (93.2%) provide basic corrective failure (e.g.,break/fix) as part of their program. Only 50.4% include preventative maintenance. Less than 40% offer a broader array of value added services such as calibration, inspection, recalls, and disaster recovery as part of the portfolio.
Indicating the level of service commitment the customer can expect to receive is also important when it comes to selling EW/ES programs. Only 58.1% of companies have defined onsite response times as part of their programs, 39.3% specify parts delivery times, 29.9% and 31.6% respectively commit to the repair time and remote resolution times, and 15.0% will provide a loaner unit if repair time target is not met.
Staying in Contact with Your Customers
The way in which these programs are promoted can also impacts KPIs. Most companies surveyed rely on direct mail (74.8%) and brochures (68.0%) to sell EW/ES programs. Most respondents (58.5%) indicate that direct sales have been very effective when it comes to impacting attachment rates while only 26.6% believe that brochures are as effective. Interestingly, survey respondents agree that other tactics are just as effective. For example, 50% of respondents indicate that endorsements and testimonials are very effective as are reputation management (49.1%), telemarketing (32.0%), and public relations (28.9%).
Frequency of communication is also a critical driver when it comes to influencing attachment and renewal rates. Almost half (49%) of respondents indicate that they sell EW/ES programs any time after the original product sale which means they capture revenue at any point in time during the product’s lifecycle. Only 28.0% notify customers 90 days or more in advance of when their programs are up for renewal and 36.0% provide more than 3 notifications that their contracts are about to expire. More importantly, most (60%) respondents upsell their programs during the warranty entitlement process. As a result, they experience incremental improvements in attachment rates; 36.5% indicate they have experienced a 10% to 25% improvement and 20.1% have experienced a 26% to 50% improvement from pursuing this tactic.
Manufactures who experience high EW/ES contract attachment and renewal rates understand that the activities involved in marketing and selling these programs is separate and distinct from those involved in selling products. These companies recognize that EW/ES programs won’t sell themselves. They understand that just because the customer owns the product doesn’t guarantee they’ll buy the service. In addition, best in class companies make sure they have the right systems and processes in place to market and sell service contracts. For example, processes and systems that facilitate a company’s ability to configure, price, and quote customized service contracts. While 87.5% of companies surveyed have a formal process in place to configure and price service programs, only 13% employ a Configure, Price, and Quote (CPQ) software application; many continue to use spreadsheets.
The survey findings suggest that best in class companies follow a structured and disciplined approach to marketing and selling extended warranties and service programs. They have implemented the right systems and processes to facilitate high attachment and renewal rates. These companies do not view sales of these programs as a one-time event to be made only at the product point of sale. Indeed, they sell beyond the original point of purchase and align attachment and renewals with the customer entitlement process. Furthermore, they promote their programs through a wide array of marketing communications tactics and rely on frequent and timely communication to get their message across. Most importantly, they ensure their programs are designed to meet the needs of their customer and are very specific about what the customer can expect to receive in terms of service features, resources, and coverage.
About the Authors
Michael R. Blumberg is a Certified Management Consultant (CMC) and president of Blumberg Advisory Group, Inc. His firm provides clients with strategic and tactical assistance for improving their overall profitability and the quality of technical support and aftermarket service operations. Michael is a result oriented, business leader with unequaled background in the High-Technology arena. He is highly skilled at developing innovative business strategies that effectively respond to industry trends and leverage advanced technology to improve the financial and operational performance of his clients. Michael is a prolific author and frequent speaker at industry events and conferences.
He may be reached at 855-643-9060 ext. 703 or via email at email@example.com. Michael’s blog is accessible at www.michaelrblumberg.com. Follow him on twitter via @blumberg1.
Ron Giuntini is Founder and CEO of G35 Software, Inc., a PA-based start-up that supplies a cloud-accessed, subscription-billed application software product that empowers a B2B sales team to configure and price customized quotes for extended-services delivering machine maintenance management solutions.
Prior to founding G35 Software, Ron was engaged for 35+ years working as a management consultant for Booz & Company, as a Business Unit Leader for an OEM and as the owner of a boutique management consultant engaged by such organizations as Acer Computer, General Dynamics, GE, Lockheed Martin, L-3, FLIR, JLG, DynCorp, Navistar, BAE Systems, Northrop Grumman, Coherent, Rockwell Collins, Bell Helicopter, US Army, USMC, FMC Technologies, DRS, Dassault, and many others.
He has published extensively, from trade journals such as Material Handling & Logistics, to professional publications such as the Society of Automotive Engineers, to academic journals such as Business Horizons (Indiana University), and has been quoted in the Wall Street Journal.
Ron received his MBA from Indiana University at Bloomington, a BA from the State University of New York at Stony Brook and is certified by APICS as a CPIM.
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