BrainTrust Query: Dick’s No Sweat Protection Plan – A Classic Loyalty Asterisk
Commentary by Bill Hanifin
Through a special arrangement, presented here for
discussion is a summary of a current article from the Hanifin Loyalty blog.
These
days, it seems that consumers can’t buy a major appliance, personal
computer, or big screen television without being offered an extended warranty.
The
irony in the sales pitch is that talking points from store personnel leading
up to the purchase decision are centered on the high quality of the item being
considered for purchase. Once that decision is made — whoosh — the chatter
morphs to emphasize the need for a consumer protection plan to shield you from
any number of consequences — especially manufacturer defects.
If there was
ever a better example of fear-based selling, I can’t think
of one.
Long ago, I added extended
warranty plans to the list of “loyalty
asterisks” in the market today.
As a brand, you should be careful to monitor the presence
of the loyalty asterisk in your marketing mix as they throw up barriers, making
long-term customer loyalty tougher to achieve by creating mistrust and diluting
value.
I’ll leave the full analysis of when it makes sense to buy extended
warranties to Consumer Reports and others who have more time on their
hands. I do instinctively know that the lower the price and more disposable
the item, the less it makes sense to buy a protection plan.
Always shopping
with a cautious eye towards these plans, I was gripped by signage in Dick’s
Sporting Goods offering Footwear Coverage. As the copy read, I was being offered “Added
protection from failures due to defects in materials and workmanship, including
those experienced during normal wear and tear.”
Dick’s launched its “No
Sweat Product Protection” program back
in February 2009 across a number of items, including footwear.
A call to a
Dick’s store in Pennsylvania indicated that the program is still in place.
Under the program, customers receive a gift card worth the original value
of the shoe if it shows any defects under typical use over a 13-month period,
according to a store associate. For shoes costing under $40, warranty coverage
costs $4.00; for those between $40 and $80, it costs $9; and for shoes priced
between $80 and $120, $12.
I’ve been running since I was 15 and am convinced
that it is wise to replace running shoes every 400-500 miles to improve performance
and avoid injury. Depending on your running volume, that equates to two pairs
of new running shoes per year for anyone training for more than a dog walk.
That
said, the idea of a consumer protection plan for running or any other athletic
shoes is just plain mad. While it makes more sense for high-priced treadmills,
its value is questionable for expendables such as shoes. Readers of Runner’s
World seem to agree.
Dick’s offers ScoreCard Rewards, a basic rewards program
that delivers about a three percent deferred discount (spend $300 get $10).
With consumers seeking transparency and value in the retail shopping experience
these days, the offer of a clearly suspect extended warranty product undermines
the “loyalty” that
Dick’s is seeking.
Discussion Questions: Do extended warranty programs at retail undermine
loyalty efforts? Is there a right and wrong way to present them to customers
during the selling process?
There is a certain irony about sales pitches, particularly in consumer electronics and household appliances, which transform from “buy it because of it’s great quality,” to “now buy the extended warranty” once the consumer purchases.
Extended warranties are a bit like fabric protection for furniture — stunning margins for the retailer and a little bit of insurance for the consumer. I don’t think it undermines loyalty, particularly, and most consumers make a quasi-informed purchase decision on the spot to buy the policy or not.
I don’t even think of it in terms of loyalty. Loyalty comes from a satisfactory shopping experience, not from a retailer trying to sell me an add-on as I check out.
In the “Done Right” column, I think of Costco’s Concierge Services that provide free tech support, a 90-day money back guarantee, and a 2nd year of warranty on some big-ticket electronics items (like TVs), or of Eddie Bauer’s lifetime unconditional money-back guarantee. In the “Done Wrong” column, I put the expensive, hard-sell programs at Sears and Best Buy that make the shopper fear that they may have just spent $1,000 on a total lemon of a TV, and that their only hope is to buy insurance.
So, what’s the essential difference? “Done Well” is free, and it says to the consumer “we’re so sure you’ll be happy, we’re willing to take on the risk that you might not be.” “Done Wrong” is not free, and it says to the consumer “we just sold you something of dubious quality; it’s your problem now, but we’re willing to make money as an insurance company too.”
Needless to say, I bought my TV at Costco.
Generally, consumers view extended warranty programs as useless since rarely does one actually get any benefit. They are usually just an added charge with no real benefit. Most are designed in a way that they will never have to pay off. I think extended warranties have no place in retail and they undermine the integrity of a retailer. When a retailer offers me an extended warranty, in my mind they have just taken a step down in class.
Extended warranties are like accidental death policies. The only one who makes money out of them is the retailer or insurance company.
Use yoru American Express or other premium credit cards and pick up a double-your- manufacturer’s-warranty as part of the card services.
Certain types of retailers earn up to 35% of their net profit from selling extended warranties. That’s the motivation, pure and simple.
Car dealers pioneered this idea with rust proofing, paint sealants and fabric protectors. Then they took it to the next level with extended warranties.
Sometimes, there’s nothing like a story to make a point. My last new vehicle purchase was a truck for the farm. I was in the market for “durable and capable” and the salesman I was working with did a great job of turning me from my normal brand to his truck based on superior performance on just those attributes.
We wrapped up the deal that evening and I was told I would have to wait to see the finance manager. Since I was not financing the purchase and the salesman already had my check, I wasn’t very happy about that since he was “a little backed up” and I was a whole lot hungry. Nonetheless, wait for the finance manager to “close the paperwork” I must.
By the time I got into his office almost an hour later, I was fuming. But then it happened — the EXTENDED WARRANTY PITCH. I flatly said “no” and asked that we move on. The finance manager took another run at me. “No” I repeated. “My philosophy is that buying insurance is betting against yourself and your own decisions, and I don’t think that’s a good deal.”
Well! The finance manager got huffy and said, “OK, Mr. Ball — but our customers who come in here to have that $6,000 computer replaced don’t think it’s a bad deal!”
That was it. I turned to the salesman and said, “So, you sold me this truck based on durability and I’m going to have to replace a $6,000 computer in less than three years? I don’t think I need this truck at all.” And I stood up and walked out.
Both their faces went completely pale. I wish you could have all been there to see the Three Stooges movie scene that followed as the two of them tried to get through the door to catch me at the same time! My wife was with me and she still bursts out laughing every time the story comes up.
The owner of the dealership eventually got involved and I wound up with what has turned out to be a great truck, with no computer problems, and an even better deal than the one I originally agreed to. But I didn’t wind up with an extended warranty.
Does anyone really buy these things? Hasn’t there been enough press saying that they ware not worth it? Doesn’t everyone know credit card companies offer similar protection at no cost?
I don’t blame the retailers for offering extended protection. Why not? But, I must say, I have never been asked more than casually if I wanted an extended warranty. And once I said no, I wasn’t asked again.
Is there a right way to present these? As a matter of fact, the last computer I bought at Staples was warrantied by the retailer along with a year of free tech support. The smart retailer knows the low cost and high price at which the competition is offering warranties. Why not turn it around like Staples did and give me that “$139.00” value absolutely free?
Potentially, it all will be predicated on how data is used and if the protection plans are perceived to have value.
The practical side of business dictates that extended warranties will remain with us as long as they constitute a significant profit opportunity for retailers.
Consumers can (I hope!) quickly calculate the balance between price point and longevity of the item to arrive at a proper evaluation of whether the extended warranty makes sense.
It is the outliers, similar to the extended shoe warranty mentioned in the article, that have potential to offend the sensibilities of consumers and dilute brand loyalty.
Warranty programs can play a part in loyalty but they need to be delivered to the right loyal customer at the right time. This should be just an option that is one of many that drive different individuals to be loyal. This is just another reason why loyalty needs to evolve to the next level — delivering relevant messages at the individual consumer level based on the individual’s preferences and buying behaviors.
If the warranty offer is delivered in the wrong way to a loyal customer, such as pushed at point of sale, it can actually negatively impact a customer’s loyalty. And just considering the comments on this post, their is such a small base of customers that take advantage of these programs that it needs to be presented at the right time through the right channel of communication.
I sold home security systems for a period of time. I was financially successful until I decided to join the management team. Much of the success came from selling the protection programs. I was paid well for each sale. The close rate was well over 90% or it was a bad month. The number of service calls over a three year period was so minimal that the program was always a huge profit center for the company. I have seen many extended warranty / service programs. They are each and every one a winner for the company. As hard as it is to see how Dick’s will make a profit on the warranty, I assure you they will. Think about the return visits to the store and how much additional will be spent each visit, especially if you take your children with you.
Most consumers are very suspect of warranty programs. They feel that most are a scam. I recommend that retailers focus more on other ways to reward customers.
Let’s make the initial assumption that customer-centric marketing practices are truly about doing what is in the best interest of the customer. (If we don’t have that, then we don’t have anything).
Let’s then assume that the company does its best to select products that they are proud to sell. (If we don’t have that, then customer-centricity rings hollow).
Then…a protection plan for customers can make sense in categories where products are inherently fragile (e.g. iPods) and the customer may in some way damage it. You can sell fragile products that you are proud of (china, anyone?), and still be customer centric.
So when is a product protection plan in conflict with customer-centric retailing? When customers really don’t need the plan, that is when! Provide customers with the real data (12% of customers find that they damage a plate in 6 months) and then let the customer decide. When you hide the data and attempt to sell by fear, you are reverting to bad profits, which always cost in the long term.
Interesting thoughts Bill, as always. Whether it’s buying shoes at Dick’s or even a luxury car, there are often things that retailers do after a sale has essentially been made that at a minimum affect the satisfaction of the experience and can often undermine the loyalty engendered through the customer experience. It all comes back to thinking through what a company offers, its brand proposition and how it delivers that proposition–throughout the customer experience.