Finding the True Value of Extended Service Programs, Part 1: Modernization

Authored by Nathan Baldwin, EVP General Manager, After, Inc.

We’ve worked on dozens of extended service programs, or ESPs (sometimes called extended warranty plans), over the last few years, and I wanted to pull together a few general observations I’ve made along the way. So here’s the first chapter in a three-part series that looks at how to make such programs better.

The revenue made from service contracts can be an extremely valuable source of profits for manufacturers and retailers, yet the true value potential is often not realized. One fundamental issue I see often is that ESPs are not run as marketing programs. Instead, the people who run them either report to finance or to customer service rather than marketing, with the result that a premium is placed on operational efficiency. Such operations tend to be viewed as stable profit centers, whose revenue growth is mainly dependent on unit sales, and at times a “if it’s not broke, don’t fix it” mentality takes hold.

Sometimes, companies outsource the marketing to providers of insurance or administrative services; sectors known for their efficiency, but not for marketing savvy. It is common practice for such providers to make their own brands visible to the customer, sometimes even supplanting their client’s branding. Often such providers are efficient, because they use the same program over and over again from client to client. It’s a study in “copy and paste” marketing. But would you want the first communication to your new customer to be a solicitation filled with legal terms and conditions, logos of other companies, and copy that reads like a generic offer?

This reality is unfortunate, and I’m not completely sure how it happened. If I had to guess, it looks like many of these programs were originally set up by insurance companies and eventually copied by manufactures and retailers with little to no input from the marketing community. The emphasis was clearly put around insurance products and the protection from risk and not on building a long term relationship with a valuable customer.

One of the fundamental shifts we bring to client organizations is a renewed focus on marketing and how it can improve ESP programs. For example, take the marketing materials many of these companies use – these have often been stripped down to the bare essentials: bland, colorless pieces that look more like contracts; websites that look like they were designed circa 1996; and call centers operated to minimize time on call (we’ve even seen a few that were simply voicemail boxes!). They are efficient, but only because they are so low-cost.

Yet for a relatively small investment, marketing pieces can be made more compelling and interesting, web sites can be modernized, and the buying experience can be made more satisfying. One of the things that companies discover when they shift into marketing mode is that they have literally been sitting on a pot of gold: response rates soar and revenues climb sharply as customers see something fresh and attractive that makes a strong appeal for ESP service contracts. Not surprisingly, the gains are often greatest in cases where an insurance company was running the program, all the more so, since the commission checks from the provider were often paltry sums.

Modernization entails more than just creating brighter marketing pieces. For example, improvements can come out of a much deeper understanding of the claims risk of the program. In the name of efficiency, many programs are designed so that pricing is done to achieve a return based on average risk of claims across all products. Yet, risk is often concentrated in a few areas. The result is a lazy approach to pricing that winds up inflating contracts beyond what consumers will pay.

So as marketers, we find that performing deep and ongoing analysis of loss costs helps us improve marketing performance. We can make sure that contracts are priced at a level where they are both attractive to the customer and adequately cover claims risk. When we find this “sweet spot” and then communicate the value proposition to the customer clearly and effectively, the value of the portfolio grows substantially.

There are several other aspects of ESPs that lend themselves to rapid modernization that in turn leads to better marketing performance. For example, there is a genuine opportunity to make these programs a building block of a wider relationship marketing approach that creates value for the customer and generates greater loyalty. That’s what we’ll look at in the next installments:

Part 2: Continuity

Part 3: Valuable Data