Friday, December 7, 2007

For-use-only charge extended warranty could be marketing coup

Why not change the paradigm on offering extended warranties?

My suggestion is to have a set price for a three-year warranty and only charge the customer if they use it. I used to purchase extended warranties but never used them. I now say “no, thank you” and hope that the product will be OK. Most of the time it is. But if we had a "pay-when-you-use-it" warranty available, I think this could be a selling point for our customers.

Thanks for the suggestion. You’re absolutely right that a for-use-only charge would be a viable product support model. In fact, we already offer this option—it’s called “paying for the repair.” If you’ve ever taken your car to the mechanic, you’re familiar with this concept. The mechanic looks at your car, tells you what’s wrong, and then fixes the problem. You then pay the mechanic for the repair part plus a little more for his time. Everybody wins—you didn’t waste your money on an extended warranty until you needed it, you paid only what the repair cost, your car now works, and the mechanic got paid for his inputs. It’s a novel concept, I know, and I’m surprised that you didn’t recognize it.

Now I know what you’re thinking—“that’s not really a warranty.” Again, surprise, you’re absolutely right! It’s not a warranty, but then again, neither is an "extended warranty." Extended warranties are really insurance policies that cover the cost of the repair should you need it. But in order for them to be viable to the insurer and to the consumer, they rely on risk pooling. If you don’t know what risk pooling is, then call Keith Crocker. Or get your own MBA. But very basically, it relies on the unknowability of the future and consumers' willingness to pay a little up front to transfer risk.

Your proposal suggests charging for the warranty only when there is no longer risk but just certainty. Now if you think this is a good idea, I recommend conducting the following experiment: let your insurance policy on your vehicle lapse. If you don’t want to wait that long, just write to your insurer and tell them you’d like to cancel your policy because you never use it. Once you receive confirmation that it has been cancelled, jump in your car (be sure to fasten your safety belt!), bring it up to a reasonably high speed, and then crash it into the nearest telephone pole.

Once you get out of the hospital (or if you were able to jump out before impact or by some other means avoid injury do this right away), call your insurance carrier and tell them you would now like to renew your policy since you now--finally!--need it.

Your insurer may in fact be willing to offer you a policy that will cover the repair and any medical or other expenses. Do not however, be surprised if the premium is equal to the cost of the repair and expenses, plus about three times what you were paying in premiums before the experiment. And that, my friend, is roughly what we would have to charge for pay-when-you-need-them extended warranties. In thinking about it, it’s a brilliant concept. If I were in charge of this product, I would hire you to be my first sales agent. Paid on straight commission, of course.

Thanks for the suggestion!

1 comment:

  1. I have to agree that extended warranties are like an insurance policy. Everyone that buys into the system share in the expense of the relatively few repairs that will be required. I personally never purchase an extended warranty for anything, unless it's a notebook computer. There's practically nothing inside those that I can get replacement parts for, and that makes the extended warranty a good gamble.

    I do understand what the original idea was about, and to some extent the old Palm devices had the same per usage "warranty" replacement fee. You send in your Palm device, they charge you $100, and in turn you get a refurbished Palm. It worked good for broken screens, dropped units and the like. It upset some people that even a $1 fix would cost them $100, but I think overall it was a good program. It could be scaled to deal with notebooks I guess, but the charges would be significant. Then again a flat $500-1000 to get your notebook swapped out might be worth it to some people... (Does it make financial sense? Only the company can judge that by looking at historical data.)