Companies spend on average 11% of revenues on marketing and 1.5% of revenues on Warranty. Despite the higher cost of marketing, why is warranty considered a cost center, but marketing is not.
The generally accepted definition is that a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits. By this definition, Warranty is considered a cost center because of the cost of Warranty Claims, while Marketing is seen as contributing to top line revenues.
A cost center is a subunit of a company that is responsible only for its costs.
A profit center is a subunit of a company that is responsible for revenues and costs.
Yes, Warranty is a cost just as marketing, sales or any other function within a company. But Warranty also contributes to the company in a number of ways including additional revenues and profitability.
Can Customer Experience focus bring Warranty and Marketing closer?
Because of the recent focus on Customer Experience Management, Marketing, Sales and Service functions are coming closer together to measure and manage all customer interactions throughout the customer lifecycle. It might be beneficial for Warranty managers to consider how Warranty fits into overall Customer Experience and Engagement. Warranty has an important role to play in building customer experience as sustainable differentiator.
This raises the following questions:
- Can a Warranty Department become a profit center?
- Is there a benefit to manage Warranty as a profit center?
- Can Warranty be considered part of Marketing instead of Service or Quality?
Examples of Warranty Driving Sales and Profits
Around 2001, Hyundai offered a 10-year, 100,000-mile warranty as compared to automotive industry’s standard three-year, 36,000-mile warranty at that time. That move was a major push to help overcome its reputation for poor quality with consumers, but also to drive quality improvement. The Warranty offering worked in improving the quality of products, brand reputation and also its car sales.
For some retailers like Best Buy, Extended Warranty Sales represent higher margin revenues decline on sales of actual products because of commoditization of consumer electronics.
Warranty as Contributor to Revenue and Profits
Warranty is not just responsible for cost, but can significantly contribute to revenues and profits. Here are some ways to look at Warranty from the revenue perspective:
- Offer Valuable Knowledge about Customers
- Grow Sales of Extended Warranty or Service Plans
- Build Brand-equity in terms of product reliability and service
- Contribute to Service and Parts Sales
- Increase warranty cost recovery
Valuable Knowledge about Customers
The Warranty department generally owns product registrations and Warranty is used as an incentive to encourage dealers or customers to register the products. The Customer data captured during Registrations provides vital information on customer profile, ownership of products, and age of the products to time replacement purchases.
This Customer knowledge is a huge asset for the company to directly engage the customers and drive more sales of related products, services and repeat purchases.
Sales of Extended Warranty or Service Plans
With a very low attach rate of service plans in most industries, they represent a huge opportunity for companies to grow revenues and profitability. In most industries, the margins on service plans are lot higher than product sales. Warranty registration, Standard warranty expiration, Warranty service events are good touch points to present a service plan offer to the customers.
service plans can also be used as a way to deliver differentiated customer experience in addition to risk protection against failures. Better customer satisfaction and service during the warranty and service contract duration increases the chance of customer retention and repeat purchases.
Brand-equity in terms of product reliability and service
Warranty duration is a signal of product quality and can be used by Marketing to differentiate products or address customer concerns. Many Brands in automotive and other durable goods industries use Warranty offering within the advertisements.
Warranty can also be used as a Marketing promotional tool. Companies can offer additional warranty or special discount extended warranty contracts to promote product sales. By using Warranty for promotions, companies can reduce the cost of direct discounts and extend the customer relationship with the brands.
Service and Parts Sales
Warranty is a good source of revenue for dealer service departments, and companies can use that to build dealer capabilities including requirements for technician certifications, training, parts inventory, and tools.
The same service capabilities will lead to more service and parts sales beyond warranty period and enable the dealers to deliver better customer service. Extended Warranty Contracts also drive the usage of service parts used to repair products beyond the warranty period. Similar to the margins on service contracts, margins on service parts can be a good source of profit for the company.
Recovery of warranty cost
Warranty department can recover up to 40-60% of warranty cost from component suppliers.
In addition, warranty department can charge back or allocate warranty costs to manufacturing organization. In fact, warranty can charge for the service provided and have all warranty claims cost recovered from manufacturing organization or suppliers.
By holding manufacturing, engineering, and suppliers accountable for the cost of poor quality, warranty can help improve manufacturing, design, and quality processes.
By offering analytic services on customer and warranty claim data, a Warranty department can provide a valuable feedback to improve product and service quality.
Making better business case for Warranty improvements
Even though Warranty cost reduction remains as the main business case for any projects to improve warranty management, you can improve the likelihood of funding by including the source of revenues and profitability in the business case.
Steps you can take to become a profit center
It is every warranty managers' responsibility to make sure that the true value of warranty is understood and realized within the company. Here are some steps you can take in improving the image of Warranty as a profit center:
- Collaborate with Marketing
By collaborating with marketing on Registrations, Warranty Promotions, service plans sales, Parts sales and Replacement product purchases, Warranty departments can get a share of hundreds of billions of marketing budget spent by companies.
- Deploy Flexible Warranty management software and capabilities
You need a Warranty Management System that goes beyond claims processing. A Warranty system needs to enable you to manage customer data, grow service plan sales, and enable flexible warranty offerings to support warranty promotions.
- Track new Warranty Metrics
To support the focus on warranty as a profit center, you need to start tracking and reporting on new warranty metrics beyond claims cost. The new metrics that are important to sustain the focus can include:
- Customer data and analytics
- New Sales with using Warranty Promotions
- Service Plan Sales
- Parts Sales from Warranty and service plans
- Warranty cost recovered from Suppliers and manufacturing
Please contact us to learn how you can transform warranty experience and position warranty as a profit center for your company.
Eric Marlan, a Senior Product Manager with Mize, manages the product roadmap for the Mize Connected Customer Experience platform and Smart Blox modules focused on the areas of Registration, Warranty, Parts, Service Plans, Support, Field Service, and Knowledge.