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Why Offer Extended Warranties? What Amazon Knows That You Should, Too...

In order to level the playing field merchants should offer extended warranties which delight customers and increase net profit

In my last post, I talked about that fact that Amazon, Best Buy, Apple, Walmart, and other top retailers all offer extended warranties. In this post I’ll explore in more detail why they do.

There are three main reasons the most successful merchants offer extended warranties and protection plans to their customers. The first, and probably most obvious reason is that sales of extended warranties drive net profit. Second, merchants see higher purchase conversion rates on products sold with a protection plan offer. Finally, the top 1% of merchants offer extended warranties because they know that happy customers are repeat customers. Extended warranties increase customer loyalty by turning a potentially negative product experience into a positive one.

Let’s explore each one of these points in detail below…

The sale of extended warranties and protection plans give merchants a new stream of revenue which flows directly to their bottom line. There is no cost to offer the extended warranty, and there are no fees to launch a program with Extend. Merchants receive a cut of the extended warranty purchase price each time a customer adds one to their product purchase, and the merchant is able to further monetize the relationship with the customer throughout the protection plan lifecycle. For example, if a product experiences a mechanical or electrical failure, or is broken as a result of accidental damage, the customer files a claim. Once the claim is approved the customer is sent back to the merchant’s store to order a replacement product, and the merchant receives the full retail price for the replacement product from Extend.

Offering extended warranties allow merchants to generate incremental revenue across multiple touch points

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The fulfillment of the customer claim results in a new sale for the merchant, and they are able to capture their full margin on the replacement item. Pretty amazing right? Incremental sales for the merchant with no marketing or customer acquisition costs. Even better is the fact that most customers, when ordering their free replacement, will opt to purchase another protection plan to cover the new item. After all, the protection plan is the reason they are getting the free replacement in the first place. And there is an opportunity for the customer to buy more products from the merchant when they get their replacement item. When you factor in the no-cost revenue from warranty sales plus the potential for additional downstream revenue from the same customers, it’s clear that offering extended warranties is one of the easiest and best ways for merchants to increase their profit.

Now let’s take a look at the impact on purchase conversion. The average conversion rate for eCommerce retailers is about 2.75%. This means that 97.25% of people who come to a retailer's site, some even who put items in their cart, don’t follow through with their purchase. Any offering that can increase the overall purchase conversion rate for merchants is an extremely valuable tool. A great example of a company that has been able to materially increase customer conversion - by offering point of sale financing - is Affirm. Merchants who add the ability to check out with Affirm see purchase conversion rates go up by as much as 25%, and average order values increase by 80%.

Or take a look at Amazon, the leading online retailer in the world. They offer extended warranties and protection plans across hundreds of thousands of products. They even offer a protection plan on $60 backpacks! Doesn’t make sense right? I was confused for a bit too, until I spoke with someone at Amazon. She told me that when a product is listed with an extended warranty alongside it, the purchase conversion rate on the product was significantly higher. This held true whether or not the customer bought the extended warranty!

amazon, a $60 backpack warranty for 4-year protection @ $9.99

Think about that for a second...consumer confidence to purchase goes up when you show consumers that someone is willing to stand behind the product they are thinking about buying. Intuitively, it makes a lot of sense, and now we can count extended warranties and protection plans as one of the few tools that really does increase shopper purchase conversion.

Along with the increased profits and higher conversion rates, the giant merchants also have found that offering extended warranties makes for happier customers. When a customer buys a new product they are excited, and looking forward to using their purchase. If that product breaks because of a mechanical or electrical failure it can be extremely frustrating. Even more frustrating is when your customer is enjoying their new headphones, tablet, or Apple Watch, and they break it themselves! We have all had accidents and broken valuable possessions, and those of us with kids know that they drop things, spill on things, and generally have no respect for new electronics, jewelry, appliances and more. Trust me, I know first hand! :-) No matter what the reason, if your customer’s recent purchase isn’t working they want a solution...fast.

This is where protection plans turn a negative consumer experience into a super positive one that builds tremendous loyalty between your store and your customers. When the item breaks and your customer needs a replacement, they quickly and easily file a claim over text, on the web, or over the phone - whatever is most convenient for them. Once the claim is approved - usually instantly - they are sent a link to get a free replacement directly from your store. The interaction is driven by Extend’s modern technology platform, and the customer experience is seamless and delightful. This reflects positively on the merchant, boosts loyalty, and drives increased sales in the future!

Extended warranties and protection plans provide value for merchants and their customers alike. Enabling Extend allows any merchant to take advantage of increased profit, higher purchase conversion, and greater customer loyalty. If you want to learn more about how your business can benefit, please get in touch or visit our website.

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Woodrow H. Levin

Founder & CEO, Extend

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