Tuesday, November 3, 2009

Reinventing Extended Warranties - The Super Soaker Effect

[Or: How to convert a Beverly Hillbilly Internet Extended Service Plan into a Super Soaker]

Let’s take a quick tour of the woes in the auto world to set the table on this one. A few years back we’d wonder if sales would be 16.5 million units, or 17 million. I made side bets with some clients and made money several times. Well, this year we are looking at 10 million units and some change. Next year looks like 12.5 million. It takes 15 million units a year just to replace the aging fleet. What’s going on?

Risk aversion. Fear. Belt tightening. It’s not just the auto segment, it’s all segments.

People are afraid to commit to the $20K - $30K in loans or cash to replace the car/truck they are driving. Our internal debaters and researchers will spend the next year jawboning on this and by the time they are finished we will have a nice piece of history to reflect on. Risk aversion, fear, belt tightening, is roughly right without being precisely correct.

So, what do you want to be? A historian?

Let’s run with this fear concept.

If customers are not buying new cars and trucks because of risk aversion, and are holding on to what they’ve got for longer, they might be interested in an extended warranty. That would certainly take the risk out of holding a vehicle longer, past the warranty period. We just finished a recent European customer survey and found this to be true there.

You might say that’s easy to check – just have someone go and fetch the numbers. The problem with this is that it ignores the “Super Soaker” effect. A Super Soaker is the 1989 brainchild of Lonnie Johnson (a rocket scientist). It is a gigantic pneumatic $25-$35 squirt gun that the world never saw before. Lonnie reinvented a toy segment that was characterized by 89¢ just-plain-awful squirt guns. The numbers for this segment were different before 1989. We need a Lonnie Johnson to reinvent the extended warranty segment.

Let’s play Lonnie. But, before we do, let me take a whack at describing the current state of our 89¢ squirt gun that we call “extended warranties.”
The story starts at Radio Shack and K-Mart when the cash register operator asks me if I want to spend another $4 on an extended warranty on a $10 sale-priced Mr. Coffee. After hearing this about a hundred times, I feel like slapping them and shouting back, “whadya think, I’m an idiot?” I buy a shiny new car or truck and the F&I manager tells me I’m stupid for not buying that mop & glop and security system. Next, with a smirk on his face, he wants to sell me an extended warranty. My K-Mart conditioning comes to play and I say, “no.” Freedom is 5 minutes away when I’m rid of this slime-ball F&I zombie. Besides, hey, a 3 year warranty is forever and why do I need to bother myself planning for the future? Three years pass by and I throw out a dozen cleverly designed unopened envelopes of junk mail from who-knows-who trying to sell me crap I’m suspicious of. If it were important, why would they use the US mail? The mail is for catalogs and just-plain-crap. Three years ago things were better. I think I’ll hold on to this baby for a few years longer. But, what if it breaks down? Warranty’s out. I’d like to take some of the risk out of my extended ownership. Wish I hadn’t thrown out all those envelopes. What do I do?
What do you do? Well, you can go to the manufacturer’s web site and find out about their extended warranty plans (let’s call them extended service plans – ESPs.). They typically use the Beverly Hillbillies TV show as their design inspiration. Beverly Hills = internet merchandising. Elly May Clampett = the promise. Granny Moses = the real process to buy the ESP. Jethro Bodine = the boneheads who think this stuff up. I’m Jed. Typically, you have to work the process through the dealer – the F&I manager sells it, the service manager needs to do an “inspection”, you need to bring the vehicle back and forth. Elly May ain’t nowhere to be seen. (By the way, giving an aftersales internet lead to an F&I manager makes about as much sense as Diane Von Furstenberg hosting a farting contest during Fashion Week.)

I just bought a prototype Super Soaker 48-month ESP for a 5 year old SUV that had 54,000 miles on it. I gladly spent $2,000 and another $700 for new brakes and a tie rod end. I’d do the same thing for my tractors and excavator. I really wanted the ESP “my way” and worked with a very progressive OEM and a remarkable dealer to make it happen. Rather than go through the rough-edged prototyping process, let me share with you the ultimate “my way” vision of how to convert a Beverly Hillbilly internet ESP into a Super Soaker (this is how the process should work).
  1. The process starts out in the online Owner Center where my VIN and all the service records are stored and advice is given on my car. Ford’s Owner Center is the benchmark. (GM’s is way too cluttered and compromised to focus on something like this; remember, GM’s Owner Center is the “General Store” serving up a goulash of interests appeasing a huge cross-section of GM insiders with a piece of the Yahoo turf. What we need here is a category killer).
  2. The Owner Center knows my car. It knows my mileage. It knows that it is out of warranty. It knows I need new front brakes and tie rod ends because the folks who designed the Owner Center have mined millions and millions of ROs and know what’s going on with the fleet at different times in the lifecycle.
  3. The Owner Center merchandising banners are designed like the OnStar email (OnStar is the benchmark for getting customer attention) that gives me color-coded alerts to draw my attention to things that need attention – like low tire pressure, oil changes, or, maybe, the need for an ESP.
  4. The Owner Center knows I’m a good candidate for an ESP and merchandises it to me.
  5. The Owner Center uses the data it has and calculates what the estimated payments would be on a 48-month ESP. Lump sum or monthly payments.
  6. The Owner Center has a click-to-buy button. It directs me to a fork in the path. I can contact the closest dealer and buy direct from them (button 1), or I can be directed to the closest dealer who uses an OEM-sponsored internet selling process (button 2). Stihl is the benchmark for this.
  7. I select button 2. Button 1 is pretty much reserved for the dealer’s friends and family.
  8. I am informed that I can pay now and get a 5% discount, or pay later without the discount. I can select the terms (lump sum or monthly). The 5% was easy to fund based on higher closing rates associated with an early “ask” and costs of lost sales.
  9. I am informed that my vehicle will need an inspection and I am told why that makes sense. I am told that the inspection will bring the vehicle up to “certification levels” to start the new warranty period and that the vehicle might need some maintenance or repair work. I am told that the dealer will pick up and drop off the vehicle for the inspection work and that this will be done at my convenience. Many dealers already do this for normal service– it is a best practice. Heck, even Herb Chambers does this and he’s no dummy.
  10. I am informed that it will be my choice to have the dealer perform this maintenance and repair, or that I may take the vehicle to an independent. Once the maintenance and repair work is completed, the warranty period starts. The dealer has been trained not to get greedy at this point in the process. Do not overlook this.
  11. The dealer picks up the vehicle. I get a call telling me that the vehicle needs new front brakes and a tie-rod end. No surprise here; I’ve already been conditioned to expect this. He/she emails me pictures of the damage on my vehicle and explains the “surgery” needed. Alternatively, I can get all the dealer feedback through the Owner Center. The correspondence hits on trust/value/cost/convenience.
  12. I agree to the repair work that needs to be done.
  13. I get my 5 year old 54,000 mile vehicle back with a risk adverse 48-month warranty.
Bottom Line: We need to think like Lonnie, not Granny Moses.

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