Service Contracts vs. Warranties: The Difference and Why it Matters
In my experience teaching system integrators how to structure and realize the benefits of service contracts for CEDIA University, one topic that typically receives a lot of attention is the difference between service contracts and extended warranties, and how manufacturer policies ultimately affect service contract offerings.
To start, let us first define and clarify the differences between a service contract and an extended warranty.
Careful structure of a service contract has great potential to build value for your customers.
Dealers that sell electronics, appliances, automobiles, and many other products typically offer extended warranties. They act like an insurance policy and serve to extend the manufacturer’s warranty coverage of the product, providing repair or replacement, often at little or no additional cost.
Regardless of any brief description, a certainty remains that the value of these warranties continues to wane. As consumers have become savvier and technically adept, and the prices of consumer electronics have continued to fall, the perceived value of electronics and their associated warranties has dropped significantly. Furthermore, as technology evolves at a feverish pace, products (especially electronics) often become obsolete before the extended warranty expires. Consumers are keen to these limitations, and dealers themselves have been stung by warranty companies that either do not pay or make the reimbursement process entirely too cumbersome to be effective.
Protection for You and Your Client
As opposed to extended warranties, service contracts protect the customer and the dealer, and legitimately have a place in every installation. Unlike warranties, service contracts can provide dealers a compelling bottom-line enhancement, delivering a steady stream of healthy, recurring revenue that can easily offset declining equipment margins. These serve as customer maintenance agreements and can be similar in many ways to what comes with the purchase of an automobile.
I like to use Lexus as an example. With Lexus, customers pay a premium for their vehicle, and in return, they receive white-glove service that includes preventative maintenance, some prepaid labor hours, discounts, and other valueadded services or amenities. In our world, service contracts are similarly designed to protect a client’s investment by extending the life of the equipment purchased, and operating at its optimal level. What’s more, service contracts provide a means for dealers to establish an ongoing relationship with their clients after the installation. This enables a positive customer experience from the start, and provides many opportunities for future upgrades.
Unfortunately, service contracts are often misunderstood. This is primarily because dealers are unclear as to how a manufacturer’s equipment warranty fits into the service contract picture, and it requires a change in the way that service departments are structured and services are rendered. The upside potential, however, is huge.
Today, dealers typically provide a one-year warranty on installations. This is usually just an extension of the manufacturer’s warranty, with labor also warranted for the same one-year period. The problem with this antiquated model is that manufacturers typically do not cover troubleshooting, repair, or replacement of defective products that are still under warranty (placing the cost entirely on the dealer).
As a dealer, how many times have you been called out to a site to resolve a defective product or do a firmware upgrade? How many times have you been fully (or even partially) reimbursed for the entire cost of that type of service?
The fact of the matter is that the benefits rarely, if ever, outweigh the costs. This model is broken and outdated. To make matters worse, it is costing you and your organization valuable time, money, and resources.
It is a given that the systems we install are complex. They also require a specialist to properly sell, maintain, and support each of the components involved. In a sense, we are no different from Lexus or other car dealerships. Yet, those dealers are still compensated by manufacturers for time spent servicing vehicles, whereas electronic systems integrators typically are not.
Changing Your Business Model
To rectify our current structure, dealers must evolve their standard practices and revise their business models. Service activities must be covered. Some suggestions for this would be to include labor in the initial warranty or to cover workmanship only– charging for time spent on troubleshooting, repair, or replacement services. One could also reduce the new installation warranty on labor to 90 days, then extend it under a service contract, or allow the customer to pay as they go. Regardless, dealers should be tying all of these options back to a service contract, which they and their customer understand and agree to upfront.
Putting all of this into practice is not a difficult exercise. My advice is to start with a very basic service contract package that does not include an extended equipment warranty. This will keep both your costs and the consumer price at a reasonable level. You can then add a few value-added services (e.g., firmware updates or annual inspections) that your customers will appreciate. At a minimum, your service contract should cover these value-added services, and then, let it evolve to include additional options or services provided.
It might be overwhelming to consider overhauling your organization. However, I urge you to consider the cost-benefit analysis regarding warranty versus service work provided to your customers. In most cases, the upside potential for customers and dealers alike is significant, and well worth the effort. Service contracts not only work, they protect and provide. It is that simple.
Michael Maniscalco is ihiji co-founder and vice president of technical operations. He is also the instructor for the CEDIA University course, Service Contracts with Teeth: How to Create and Sell Service Contracts to Build Your Business.