Selling Extended Warranties Sends a Mixed Message

I know it is the Christmas season because I am bombarded with extended warranty offers on everything I buy.  One sales person in particular asked me if I wanted to buy an extended warranty on a television.

ME:  “What does the warranty cover?”

HIM:  “It covers the cost of repair or replacement if something goes wrong.”

ME:  “Like, if I drop it or something?”

HIM:  “No, it doesn’t cover that.”

ME:  “Oh, you mean if there’s a power surge and the electronics get fried?”

HIM:  “No, it doesn’t really cover that either.”

ME:  “Then, what does it cover?”

HIM:  “The warranty covers any repairs needed as a result of an internal failure.”

ME:  “Internal failure, meaning defective?”

HIM:  “Yes.”

ME: “So, there’s a good chance this TV is defective and I will be screwed unless I buy the warranty?”

HIM:  “Ummmm….”

ME:  “I’ll pass.”

The logic behind selling extended warranties is fundamentally flawed.  (Yes, I recognize warranties are sold because consumers buy them and the retailer makes money.)  Selling extended warranties sends mixed messages to consumers.  On one hand, retailers depend on their customers believing in the quality of products offered and the reputation of the organization to deliver that expected level of quality.  On the other hand, customers are asked to pay a hefty fee in anticipation that the seller will fail to live up to the standard of excellence it is trying to portray.  This is the reality, but does it even make sense?  Carefully consider the following before offering to sell your customer an extended warranty.

  1. Extended warranties contradict the consumer’s sensibilities about the meaning of “fit-for-use.”  As consumers, we expect the products and services we buy to be fit-for-use, meaning those products and services will function as intended in the normal environment of its use.  For example, we don’t expect our pet fish to survive an afternoon of playtime with our pet kitten.  We do expect our snow boots to keep our feet warm and dry in the snow.  We expect our kids to be kept safe at school or camp.  Extended warranties contradict the consumer’ core belief in the product or service– the same core belief that drove the consumer to purchase the product or service.   Put yourself in the shoes of the consumer for a moment.  When we are offered an extended warranty, there arises a brief contradiction to what we believe about the product (the product is fit for use) and what the seller implies about the product (the product is not fit for use).  Alternately, when the seller of a product offers us a free bumper-to-bumper extended warranty, our core belief about the product is reassured.
  2. Extended warranties presume a lack of quality.  Why do consumers buy extended warranties?  Because consumers assume the product or service will fail sometime within its useful life.  As consumers, the more we are asked to pay for an extended warranty relative to the initial product price, the more we become convinced the product might be defective.  If we were to buy a computer for $1,000 and shamelessly pressured to buy an extended warranty for $250, we could assume one of two scenarios exists.  First, there is a 25% chance the PC will fail.  (Why else would the warranty be 25% of the purchase price?)  Alternatively, we could assume that there is a much lower chance of failure, the seller knows it, and is just trying to make extraneous profit on the sale.  Either scenario creates distrust between the buyer and seller based on the presumption of the lack of quality in either the initial product or the subsequent customer relationship.
  3. Extended warranties reduce the incentive to build quality products.  Extended warranties are often backed by a third party (excluding most automotive and Apple warranties).  So, if the product is defective, it is NOT the manufacturer taking the financial risk for failures.  In fact, the manufacturer may never see its lack of quality.  The third-party backer will repair or replace the product from the funds collected from the 75% of consumers whose products do not fail.  The cost of the poor quality is not transparently passed back to the entity responsible for poor quality in the first place.  The extended warranty, in effect, insulates the guilty party from fully feeling the pain of inferior products.  The producer is numb to the “improve-or-die” incentive inherent in companies that stand behind the quality of its products.  [This reasoning should encourage consumers to give preference to products and services backed by the manufacturer directly.]

As a practical matter, there is a time and place for extended warranties.  It is always wise to weigh the risks and reward of such offers before any major purchase.  The philosophical dilemma is in the message extended warranties send.  As you think about your business model, consider every single message you send to your customers, whether expressed or implied.  We know that extended warranties generate revenue, but what do they say about our product or service?   What quality statement is made by a surgeon offering to sell you life insurance just prior to performing your surgery?   – Jason Kilgore

Learning from Verizon Fios – The Parable of Getting Results

We recently decided to switch our cable, internet, and phone to Verizon Fios. I could add this story to Chapter 3 of The Elegant Process  – another example of how a company’s mistakes can cost them a lot of money.  But my problem with Verizon Fios is more of a parable about the challenges in getting results.   And, getting results is what process improvement is all about.

Like 99.99% of residential customers switching carriers, we wanted to keep our old phone number.  But, when Verizon installed the new service, they also gave us a new phone number – a new phone number that I neither asked for nor wanted. One would think that resolving this problem would be simple, but it has not been so.  I have been on the phone with Verizon’s customer support for no less than 3 hours per week for the last 4 weeks trying to get this problem resolved.  This on-going and as-of-yet-unresolved frustration reminds me of three very important aspects of problem solving.

  1. Communicate the desired future state concisely, consistently, and frequently.   Each time I am on the phone with Verizon’s Fios Customer {lack of} Support, I state the following, “My name is Jason Kilgore and I am calling you today to get my phone number back.”  Then, the back-and-forth problem solving commences.  It is important to restate the goal so that no one loses sight of what must be accomplished.
  2. Ensure everyone knows what they are supposed to do next.  Re-activating a phone number that has been inactivated requires a ton of action items.  So, before concluding each call, I make it a point to restate what is supposed to happen next, who is responsible, and when it is to be completed – just so we are all on the same page.  In any productive work group, meeting, or planning session, a final review of the action items ensures everyone understands the game plan and reinforces personal accountability.
  3. Follow up on key deliverables as they come due. According to Verizon, each step will be completed in the next 24-48 hours.  So, sometime within the next 24-48 hours, I call them back to document the progress of the project.  And, it’s a good thing I do.  Verizon and I have worked through issues including data entry errors and lack of a clear process for recovering inactivated numbers.  None of these mistakes would have been proactively resolved in a timely manner without my intervention.  Because I am the one who wants my phone number back, I am the one responsible to get it back.  For me to think this problem is Verizon’s problem will only result in my never getting my phone number back.

Thomas Edison was noted for saying, “Genius is one percent inspiration, ninety-nine percent perspiration.”  Perhaps, the same is true for problem-solving.  If you are to solve your company’s most pressing issues, it will be less about methods and frameworks and more about your determination to succeed.

What Lean and Six Sigma CAN’T Do

By now, you have probably realized that I am a process innovation nut.  I must have a mutated gene, for I see everything in life as a process – a series of steps marching to a rhythm and flow toward some objective.  Tools such as Lean and Six Sigma serve as lenses through which I view my surroundings.  When I go to a restaurant, I calculate the number of steps taken by the waiter.  Then determine which of those are value-adding and value-robbing.  I spend dinner time trying to figure out a more efficient pattern and route the waiter could take to maximize his or her table turns.

In recent months, I’ve noticed, my experiences do not always fall so neatly into my highly pragmatic internal classification and problem-solving framework.  I battle with questions like – Why are the chicks at Chik-fil-A so freaking friendly?  Why does Apple call their tech support the “Genius Bar” and Best Buy calls theirs “Geek Squad”?  Why is Disney World the “happiest place on earth” and the Denbigh Wal-Mart the eighth level of Hell?

Several months ago, I was introduced to Jake Poore and Integrated Loyalty Systems. Jake preaches a new process gospel – the excellent customer experience.  (I am trying to reconcile his concepts with the Lean and Six Sigma concepts into a nice, neat little philosophical package.)  Jake espouses two tools useful in evaluating the customer experience.  1) The Customer Compass – understanding the Needs, Emotions, Stereotypes, and Wishes of the customer (Get it!?  N-E-S-W, like on a compass).  2) The Touchpoint Map – dissecting the customer experience in light of the customer’s compass.  These add a dimension to process improvement that Lean and Six Sigma totally neglect.  Jake’s system addresses feelings, a topic I am not generally comfortable discussing.  I am, however, learning to place more and more significance, not just on how processes benefit the consumer intellectually, but how those processes make the consumer feel.  And research shows that we make purchases based on how and what we feel.

Lean and Six Sigma guide us in assembling the nuts and bolts of our business.  They identify the operational details, parsing waste from value.  But, they don’t force us to emotionally connect to with our customers.  While we invest a ton of resources in gaining efficiency, how much do we invest in creating relationship-based loyalty?  I would propose that if process innovation, improvement, and control form the foundation of the “house of quality,” then the customer’s experience is the lawn, front door, exterior, furniture, widows, and kitchen sink.