Maximizing Profit in Warranty Marketing Programs

Introduction

In this post, we will explain how manufacturers can maximize the value of their Extended Warranty (EW) or Extended Service Contract (ESC) programs and drive significant upside.  Over the past fourteen years, After, Inc. has developed a Warranty Marketing Framework that helps ESC program profits skyrocket.   Using a customer-focused, analytics-based marketing approach, we have helped our manufacturing clients across a variety of industries see the true value potential – financial value, customer value and data value – of their Extended Warranty programs.

 Financial Value: Maximizing ROI

What many manufacturers don’t realize is that the key to maximizing financial value in an Extended Service Contract (ESC) business is to treat it like a marketing program.  Most ESC businesses are managed by internal finance or operations teams or are outsourced to a third party (typically an insurer).  Both of these groups are incented to pursue a low cost, risk mitigation management approach.  ESC businesses are seen as stable sources of incremental profit – with growth dependent on unit sales growth.  We’ve shown numerous manufacturer’s that with a few tweaks to their ESC marketing approach, they can drive millions in financial upside for their organizations.

Our 4P’s Framework

At After, Inc., we’ve seen how the right ESC marketing approach can increase profits for our clients by as much as +50%.  How do we do it?  Like any successful marketing strategist, we start with the 4 P’s.  We develop the right promotional message and send it to the right person (target audience) at the right time, through the right channels (place), at the right price point.

The 4P’s framework provides a foundation for increased ESC response rates, conversion rates, revenues and profits.

1. Promotion: the right message and format. We have found through extensive testing that the best format for delivering the ESC offer is a personalized letter that is clear and concise.  ESC offers can come with pages of terms and footnotes, confusing the customer, and leading to low conversion rates.  We not only personalize the letter to an individual’s characteristics, but also offer links to websites and a phone number to dial where he/she can get additional information and ask questions.

2. Person: the right target audience.  The most effective ESC campaigns are those that target customers who have the highest likelihood to purchase.  Analyzing our customers’ purchase data reveals patterns.  We gather, centralize, integrate and analyze thousands of behavioral, demographic and lifestyle data characteristics of customers who have purchased contracts in the past.  Then we use those characteristics to build a customized predictive model that determines likelihood to purchase a contract in the future. (See our recent blog post on three most common predictive models used in warranty marketing: “How Predictive Analytics Optimizes Warranty Marketing, November 21, 2018.)

3. Timing (not one of the 4 P’s but an essential factor): the right time.  We have found that there are two times during the manufacturer’s warranty period when a customer has the highest likelihood to purchase an extended services contact – at the beginning and at the end.  We have also discovered that the more times you touch the customer during the manufacturer’s warranty period, the higher the likelihood to purchase.  For every client, we conduct extensive testing to determine the most effective timing intervals to communicate.  Then, we utilize predictive modeling (likelihood to purchase and Customer Lifetime Value models) to determine the optimum number of touches per customer.

4. Place – the right channel or channels. Over the last decade, we learned that utilizing multiple marketing channels for an ESC campaign has a positive effect on conversion rates.  Direct mail is the primary channel for ESC marketing, but we complement it with email, social media and outbound telemarketing.  When it comes to the actual purchase event, we make it as easy as possible for the customer to complete, providing several options (online with a credit card, call center with an agent, handwritten check in the mail) to close the sale.

5. Pricing – the right price. Most manufacturers’ ESC programs are designed so that pricing is done to achieve a return based on the average risk of claims across products.  Yet, we know that risk is typically concentrated in a few areas.  Thus, pricing can be inflated and consumers may be less willing to purchase the contract.  In order to optimize pricing, we perform ongoing analysis of loss costs to ensure that contracts are priced at a level which is both attractive to the customer and adequately covers claims costs.  This leads to maximum profits.

Customer Value: Innovative Approaches to Pricing / Contract Terms

We believe that a key barrier to achieving true customer value from your ESP program – long term relationships with your customers – lies in the setting of short-term operational efficiency and profitability goals.  Changing a client’s mindset to focus on long term customer retention and profitability goals can drive major improvements in customer satisfaction, retention, and brand equity.

Consider the following:  what would happen if you lowered the price of your ESC product and increased the contract term, in exchange for a required annual maintenance appointment with all repairs done with genuine OEM parts?  You might see the following results (we did!):

1. Higher ESC product sales given the lower price/longer term.
2. Higher margin from services and accessories sold during the annual appointment that covered any additional costs and mitigated the risk of extending the contract period.
3. Lower unexpected repairs given proactive maintenance – a win/win for both sides.
4. Higher OEM part sales with lower risk for re-repair – which is often traced to the use of non-OEM parts.
5. In summary: increased revenues, lower service costs, and higher customer retention.

While each client is different and any change to pricing/terms requires significant analysis, After’s approach focuses on delivering innovative and customized recommendations to maximize customer value.

Data Value: Leveraging Warranty Data Across the Enterprise

The third major benefit of After’s data-driven marketing approach is the ability to leverage warranty data to drive additional revenue opportunities.  For example, we have found that ESP adoption can also be a predictor of other OEM accessory and consumable purchases.  We can use the same data to predict repurchase timing, the likelihood to participate in a recall, and even the likelihood to become an advocate in the social space.

Warranty data analysis can also help quality, finance and engineering teams determine things like: early warnings for product failure; median time to repair for various parts, products and equipment; causal part analysis (which parts are causing the most or most costly unplanned repairs what to do about it), and much more.  Engineers can use the data to proactively make changes to production runs before a product issue grows into a major recall.  Warranty data is an asset in itself; but when used by warranty data experts like After, Inc. to develop predictive insights, it can deliver exponential value to an enterprise.

 

After, Inc. has been a leader in Warranty Analytics, Marketing and Program Management since 2005.  If you’d like to learn more about our Warranty Marketing Services, please visit our solutions page at http://afterinc.com/warranty-marketing/.  If you would like to discuss your ESC business specifically, please contact us http://afterinc.com/contact/. We look forward to hearing from you.