Why free🆓 long-term warranties☂️ are a bad idea - Part Two (7 min read)

There is a Trade-Off ⚖

As affirmed by Frances Frei1 on his Harvard Business Review article, there is no free lunch! While Frances was not specifically referring to warranties, the point is the same. There are multiple downsides to a company providing free long-term warranties.

Liability Instead of Revenue

First and foremost, a free long-term warranty will take away the opportunity to sell a service contract to the customer, depriving the company of precious revenue, while adding liability to its books.

No Relationship and More Lost Revenue

Customers who get a free long-term warranty are far more likely to avoid buying services altogether, even during the warranty period.

• With free warranties comes the typical sales pitch that usually goes something like “We back our product” or “I’ve got you covered for X number of years”. Fueled by this short-sighted idea that service is included, many customers won’t even bother with planned/preventive maintenance, software or system upgrades, or even product training unless those were also given away for free.

• Operational budgets are usually used to buy service contracts and are set based on the expectation of expenditures. When a free warranty takes the place of a service contract, then funds are simply never added to the operational budget. Even when customers realize that they need the service contract, there is simply no money allocated for that purpose.

• Unless the instrument failed a lot, in which case they will be pretty upset, customers with long term warranties often lose touch with the manufacturer. If the customer was never given the sales pitch mentioned above, the lack of relationship/partnership with the Service team will likely be the proverbial nail in the coffin for selling services, and perhaps even spare and consumable parts.

It is not that uncommon for customers that get these free warranties to actually be the most dissatisfied and least loyal ones. That’s because they don’t get the most out of their investment. Besides the lost relationship, the manufacturer also loses out on the revenue from all those services.

Service Degradation

Since a long-term warranty is provided free of charge, there will be little to no investment in people, systems and tools for the Service team. With every additional product sold, the amount of work for the Service team increases, thus undermining the team’s ability to provide high quality service to ALL customers. While the cost of service is hardly ever the key determining factor for product purchases, the quality and availability of service are often some of the main reasons cited for selecting one vendor over another. If the long-term warranties are used extensively, they will eventually lead to horror stories that will undermine the company’s ability to sell their products.

A Winning Warranty for Capital Equipment Manufacturers🌟

The design of the warranty is where the problem lies. When the warranty’s purpose is to match competitors or is used as an incentive to buy the product, customers get the absolute bare minimum and even that, comes with some restrictions as we’ve shown in part one of this article.

Hahn Consulting Warranty Strategy

Performance Warranty Period

Short Long

High 😀 🙁

Low 🙁 😐

According to Hahn Consulting2, the four-quadrant shown above explain the level of customer satisfaction given warranty performance and warranty period. The most typical warranty offered by capital equipment manufacturers is the bottom right. The top left quadrant however is the strategy that produces the highest customer satisfaction, while maximizing extended warranty and service contract opportunities.

Shorter is Better!

Most customers expect a brand-new product to work flawlessly for at least a year, so the typical warranty with its focus on repairs is viewed as an unnecessary insurance policy. Shorter but high performing warranties should deliver services that help customers implement the technology faster, increases efficiency and minimizes equipment downtime. Marketing research is crucial to identify which services should be considered. That’s because there can be quite an extensive list of services, including product training, applications support, consultation services, remote services, calibration or PM services, data services, etc.

New Revenue Opportunities

The short-term, high performing warranty strategy ensure that customers will experience one or more service events, thus allowing the Service team to build a relationship with the customer. These relationships build trust and create the ideal environment to sell service contracts or warranty extensions. Even customers who forgo a service contract at Point of Sale, may change their minds once they experience the high performing services delivered during the short-term warranty.

Leverage the Opportunity

A very common gap that many capital equipment manufacturers experience is the inability to identify who is responsible for equipment maintenance and repairs at the customer’s site(s). This gap could potentially be mitigated by simply making a product registration a requirement to access those value-added services. This information is absolutely invaluable for a number of reasons:

• Service Sales needs to know who to contact to sell service contracts

• FSEs need to know who they should talk to when they show up at the customer’s site

• Regulatory may need to contact customers if a product recall is in play

🚦 Final Conclusion

Long term warranties typically come with some major limitations, which reduce the level of service to the customer and deprives the company of valuable revenue that could be invested to improve the service for ALL customers. We’ve provided the evidence in this article to support the theory that free long-term warranties do little to nothing to help sell the product. Shorter term but high performing warranties should be used to maximize customer satisfaction, while increasing extended warranty and service contract opportunities.

Cited Sources:

1 The Four Things a Service Business Must Get Right, Frances X. Frei, Harvard Business Review, https://hbr.org/2008/04/the-four-things-a-service-business-must-get-right

2 The Best Practices of Services Marketing, Hahn Consulting

#servicebusiness #servicesmarketing #medtech #medicaldevices #medicine #servicemanagement