How to Increase Your Margins By 10%, Right Now

Why extended warranties warrant your attention

By Rich Lindblom, YSN

There is an absolute cash cow out there that some dealers are totally ignoring, or at least not fully milking, and that is extended service plans (ESPs).

Sure, it takes a little effort to sell them, but isn’t adding five to ten points of margin worth it?

When you get right down to it, selling ESPs is the quickest and easiest way to add to both your average ticket size and your gross profit margins.  Let me give you an example:  For starters, you should be doubling your cost (at least) on the ESPs you are selling.  So if you sell a washer for $500 and an ESP for $100 (on which you made $50) … then Bingo! You just added ten points of margin to your bottom line

But there are added back-end benefits as well.  If you are a servicing dealer, and more than 80 percent of BrandSource members are, you also get the ancillary benefit of future service revenues.  With just about every third-party extended warranty provider out there today, the selling dealer gets the right of first refusal for any service on an appliance for which the dealer sold the extended warranty.  So not only do you get the quick extra profit up front, but you also get a potential revenue stream on the back end as well. 

A recent study showed that about 47 percent of consumers typically purchase an extended warranty, so if your attachment rate on ESPs is below that, I can tell you right from the start that you have some work to do. What’s more, that same survey found that 60 percent of those surveyed believe that extended warranties, “provided value,” and 62 percent said their warranty had “helped them in the past year.”  

Come to think of it, based on those survey numbers, shouldn’t your target attachment rate for ESPs actually be 60 percent?

I’m sure you’re wondering exactly how you’re supposed to grow those attachment rates.  Well, there are actually a couple of answers to that question. The first is training and the second is incentivizing sales.

Let’s start with training. Most extended warranty providers offer some type of sales training support, and that’s a great place to start. And it is just a starting point. You also need to train your salespeople to introduce the idea of an extended warranty very early in the customer conversation, even if it’s just a subtle hint. Something like, “Oh, and don’t let me forget to talk to you about our extended warranty options before we’re done; most of our customers like the feeling of security they provide.”  The point is to get it out there in the beginning so the customer has it in the back of her mind and can process it before you get to the closing.

Another issue under the training category is really more like un-training your salespeople, because the longer your salesperson has been with your company, the more likely they’ve been brought up telling customers that they don’t need an extended warranty (!), and that is a hard habit to break.  In fact, I can remember confidently telling customers myself when I first got in the business four decades ago that their new appliance should last them 20 to 30 years. 

Well, those days are gone, and you aren’t selling your grandmother’s appliances. 

According to Consumer Reports, up to 40 percent of major appliances today will require repairs within the first five years of ownership, depending upon the type of product. And given the complexity of today’s models, along with skyrocketing parts and labor costs, purchasing an extended warranty is becoming more and more advantageous.

The second way to increase your attachment rates is to incentivize your salespeople, and there are a variety of ways to do that.  Keeping in mind that you should be doubling your cost on the warranties you sell, I would start with a spiff or commission for every ESP sold.  In my company, that spiff was 10 percent of the profit on the ESP, or 5 percent of the selling price if you are doubling your cost. 

But I would take it a step further and find additional creative ways to incentivize your staff.  Here are just a couple of ideas above and beyond the basic spiff:

  • A bonus for selling a certain number of ESPs in a month.
  • A bonus for reaching a certain attachment rate or increasing one’s attachment rate from the prior month.
  • Create a monthly contest for your entire sales team, with a nice prize going to the person with the highest attachment rate.
  • Or how about a storewide contest, where everybody wins if the entire company reaches an attachment goal?

The bottom line is that selling ESPs can be very lucrative … if you do it right.

I have three goals in mind with my columns: To motivate, educate and entertain.  If I have achieved at least one of those, then I’ve done my job. Don’t be shy about letting me know if you agree — write me at egvrich@gmail.com.