Protecting customers’ investments

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The extended warranty market is growing in the current economic conditions since people are keen to protect their investments. Also the electronic gadget market creates new opportunities for warranty business, advises Richard Stevenson.

The UK warranty market was given a generally clean bill of health by the OFT earlier this year and it remains one of the strongest attachment sales sectors for retailers. Of course ‘strong’ is a relative term. Stagnant or declining sales of major electrical and electronic goods has meant less opportunity to sell warranty products overall. A continuing shift towards online sales has also had its impact on the traditional point of sale warranty business. As the warranty product is a secondary purchase and has generally required active selling, ‘click to add warranty’ online has not yet achieved high penetration. Estimates indicate less than 1% warranty take up against major appliance sales online, whereas 4-8% penetration is not uncommon in store.

However, two factors have kept warranty sales tracking ahead of total major purchases overall; the slightly countercyclical nature of the warranty business, where people are keen to protect their investment into the future, and low levels of innovation in key categories such as TV slowing upgrade sales. After the gold rush of flat panel screens and High Definition, 3D has been a damp squib and there are precious few ‘wow’ features on the horizon to get the mass market TV buyer parting with their cash. Today’s TV buyers are in for the long haul, which is reducing sales volumes overall.

Comments MD of UK Warranty, John Neil, “It is fair to say that the UK economy has had another tough year. However the white and brown goods extended warranty market reported growth to nearly £612m in 2010 and according to the latest Finacord report is forecasted to approach £628m in 2014. With these figures in mind warranties are still an extremely important part of the electronic goods marketplace.”

Location, location

Relatively new entrant to the UK warranty scene, Squaretrade, is bucking the trend in the online space by partnering with key internet retailers such as Amazon and Ebay. It is set to announce partnerships with two mass-merchants shortly and is actively targeting electrical retailers down to the larger independents. The company is building a high profile and visible online brand through customer feedback and customer reviews of its warranty services. This is quite different from traditional players such as UK Warranty and Domestic & General which often white-label their services for retailer or manufacturer branding.

Squartetrade’s strategy is to develop very high awareness and encourage customers towards unassisted warranty purchases through recommendation and the positive online feedback attached to the brand. The model has been very successful in its US home market and the parent company has raised $240m to bring the business model to the UK and Europe. For example, the customer purchasing journey includes simplified premiums based on purchase price bands, electronic receipt registration, emailed plan documentation and a self-service customer portal backed up with a phone helpline.

Vince Tseng, Squaretrade’s UK MD, sees the company’s two biggest advantages being its branded proposition and lower premiums thanks to the reduced operational (personnel) overheads of online delivery; “Squaretrade branded warranties means retailers can sell a transparent and researchable warranty proposition,” comments Tseng. “This is even more important as high street customers will research their purchases on the web before going out to buy. Moreover, in the light of OFT consumers remain generally wary of warranties. Our customer feedback, built on the likes of Facebook, TrustPilot and Review Centres, is vital in building consumer trust in our products and the service level agreements, such as our five-day service guarantee, that backs them up.”

Tseng remarks that traditional players like Domestic & General have excellent customer service but the customer rarely knows who to attribute that great service to because the warranty and customer journey is client branded. Conversely Domestic & General has built its business behind manufacturers’ brands as it believes it is those brands that the consumer ultimately trusts the most to look after their products. Clearly there is mileage in both propositions.

One thing that is very clear cut is that Squaretrade’s online platform has had a marked downward impact on premiums. The company is aiming to achieve a fully featured three-year warranty with accidental damage cover for around 20% of the purchase price. This is considerably lower premium that many traditional PoS channels which need to incorporate the costs of retailer training, margins and support as well as high head count contact centres.

Back on the high street there has been some innovation in the warranty market, largely aimed at addressing the challenging trading conditions. UK Warranty has recently launched a promotional warranty facility that retailers and manufacturers can use as a sales tool. The company firmly believes that promotional warranties can be implemented alongside paid-for extended warranty solutions as promos allow retailers to stimulate sales on a specific appliance, brand or range.

Domestic & General regularly surveys its customers to ensure every part of the warranty process, from point of sale to repairs, runs seamlessly. The company’s customer base has been steadily growing at around 5% per year and currently stands at seven million active warranty customers in the UK and over 13 million across Europe. The company underpins its business on first class customer service and is launching a raft of new initiatives for retailers and its manufacturing clients.

Comments Domestic & General’s director of sales, Jeff Griffiths, “One of the outcomes of our recent surveys was looking to improve the support for our retailers and clients. As a result we have increased the personnel within our training teams by 50% and brought in specialist skills to launch new in-store sales training initiatives. Another area of support we have been focussing on is in helping retailers maintain compliance with the requirements expected by the regulatory bodies who govern these financial services products.”

Erosion ratio

There remains a large sector of the retail community that don’t actively sell warranties, often even if they have a supplier in place. The worries of remaining compliant with regulations certainly have a part to play in this attitude but so too does the concept of selling a high value warranty against product categories suffering chronic price erosion.

“Price erosion is rife in some segments of the TV sector,” comments John Neil, “but this is typically on the lower specification models. In my experience these are not necessarily the models that are selling the best anyway. Just last month a client of UK Warranty reported their top selling TV to be a high end model with a typical retail value of around £3,000. A warranty on this TV would not seem so expensive.”

In short, adds Neil, warranties act as an attractive proposition to cost conscious customers, especially in times of economic hardship. If a consumer is prepared to spend £3,000 on a television, it is likely that their intention is to make it a long term investment. In this regard warranties are an ideal way of protecting that investment into the future.

D&G’s Griffiths agrees with the sentiment and points to the currently very high cost of repairs as a counter to the warranty price ratio argument: “Price is a commonly stated objection but our results show that when warranty products are presented in the right manner consumers are still buying in great numbers. They can also spread the payments for the warranty with our direct debit options. Integral to our new training toolkit for retailer support will be a strong focus on providing ‘hearts and minds‘ training. This ensures retail staff themselves will have the utmost confidence in the value of our warranty products and can better communicate those values to consumers at point of sale.

Future trends

So how will the retail PoS warranty business shape up in the next 12-18 months? Clearly none of the warranty players are espousing a bed of roses for retail any time soon, yet each remains confident in warranty sales growth based on its own unique business model.

“As customers’ buying habits evolve we will see a shift in PoS warranty sales,” comments UK Warranty’s John Neil. “Retailers in the high street and online will see increased competition for warranty business as customers are made aware that they can ‘shop around’. Customers are becoming more confident in buying warranties from direct-to-consumer providers and there may even be a future for warranty comparison websites recommended by OFT earlier this year.”

Channel pricing will be an increasing issue across the sector and there can be little doubt that more warranty sales will move from the traditional shop floor sales environment to online. Clearly this is not going to be an overnight shift but the rise of the internet as a service provider’s portal as well as a retail portal is inevitable. And as technology is changing so too will the warranty products designed to protect them. We will see more demand for gadget warranty such as Kindles and iPads and new ways of purchasing those warranties on the very devices they will protect. In order for high street retailers to compete they will need to build a more compelling in store warranty offering, backed by expert advice and a firm and well communicated belief in the value of the warranty product.

Squaretrade’s Vince Tseng sees a lot of warranty business developing from the device market; “Consumer electronics are getting smaller and more portable, like smart phones, tablets and e-readers. Consumers want to take these devices with them wherever they go and they realise that exposes their products to risks. For tablets, mobile phones and even GPS devices customers are seeing warranties as a ‘must have’, particularly if they have kids. Astute retailers need to capitalise on these trends.”

As product categories in today’s market go, warranties on electrical goods remain a significant chunk of business. To put it into perspective the sector in the UK is worth some five times more than the much touted headphone market, so it is little wonder that there are new entrants and new initiatives coming to market. In tough trading conditions warranties continue to add value to retail businesses.

”It is evident from both internal and external reports regarding the future of electrical retailing that trading is unlikely to get any easier over the short to mid-term,” adds D&G’s Jeff Griffiths. “However an increasing number of retailers are changing focus to meet the challenges and warranty sales can provide an avenue of profit delivery rather than liability and expense. I am confident that the workload for D&G’s retail support teams will continue to increase and we expect to see a real lift in the number of warranties being sold by our retail partners in the year ahead.”

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