Warranty Work – Pain or Profit?

Attitude – it determines a lot of what we have in life. Take warranty work. Some shop owners hate it, but other businesses profit from it.

Two Different Ways to Handle Warranty Work

Suppose a shop owner, let’s call him ‘Old Fashioned Ollie,’ has a good customer who is complaining that the air conditioning compressor he had replaced failed at 30,000 miles. That’s long after Ollie’s 12 month/12,000-mile warranty expired. But this customer brings in all his family’s cars and always pays full price.

If Ollie wants to keep the customer happy, he must do the repair again, and make it free or at a big discount. Either way, Ollie loses money. The technician also wants to be paid for his labor. Nobody is happy.

A Better Way

Suppose another shop owner, let’s call her ‘Modern Mary,’ has a similar ‘A+’ customer complain that his A/C compressor failed at 30,000 miles, long after her standard 12 month/12,000-mile warranty expired. Same deal, right? No.

Mary’s shop has a separate bank account just for warranty work. She takes money from it to buy the new compressor and all it’s related parts and supplies, and to pay her technician for the job. Everybody is happy. But where did that money in Mary’s separate bank account come from, if not out of her shop’s normal profits?

 This is Nothing New

Remember the last time you bought something new from your local home center, perhaps a new washer and drier set, a refrigerator, or even something as small as a power tool. After you agreed to buy it, the very first question they asked you was “Do you to buy want the extended warranty on this purchase?”

Prices of extended warranties vary, but are typically 10% to 15% of the purchase price. For that extra money, the store will typically double or triple the original manufacturer’s warranty.

What Does the Store Do with the Warranty Money?

When you buy an extended warranty, that is not the store’s money. They set it aside in a separate account. Then, as warranty claims arise over time, they use that money to cover the claims.

Where’s the Profit in That?

Because as time goes on, the store will see they are spending less on warranty claims then they are collecting. We’re talking long run, like three years and more. That excess money collected eventually becomes profit for the store. They can take it from the separate account and spend it as they see fit.

You Can Do the Same Thing

Let’s go back to the original A/C compressor job as our example. Suppose both Ollie and Mary’s shops charge $1,200 for the new compressor, accumulator, expansion tube, flush kit, oil, refrigerant, supplies and labor. But Mary offers every A/C compressor customer an extended warranty for an additional $150. That will extend the customer’s warranty to 36 months/ 36,000-miles, and raise the ticket amount to $1,350.

Over time Mary sees that 15 out of 20 new compressor customers buy the extended warranty, but in the long run, only 2 in 20 of those customers has a compressor failure under the extended warranty.

Suppose it costs Mary $600 to buy the parts, supplies and to pay the technician for a warranty repair. See the point? How much extra profit is Mary earning from selling extended warranties?

Hint: She collects $150 times 15, but only spends $600 times 2. Remember, we’re using round numbers just to illustrate a point. Your actual numbers will depend on your circumstances.

Watch the Legalities

Extended warranties have value, and give the buyers certain legal rights, as expected. But those rights vary by State. Each state has its own unique warranty laws you need to comply with, as well as national trade laws you must be aware of. For that reason, consult your business attorney and have him or her draft up an extended warranty agreement that complies with all applicable laws.

Likewise, consult with your CPA or accountant about the special booking procedures you will need to keep separate reserves for warranty claims.

Display Your Extended Warranty Proudly

We’ve all seen receipts that had verbiage like this stamped on them: “Warrantied for xx miles or xx months, whichever comes first. Does not include towing. All work to be done in our shop only. You might have other rights under applicable law.”

Some businesses have rubber stamps made with the wording their attorney provides, and stamp it on each relevant invoice. You’ve got to show off what you sell.

Keep the Customer Happy

The greatest benefit of offering extended warranties is that it keeps your customers protected from repeat major expenses. That makes them happy. Imagine how happy your clients would be to receive an expensive repair done free. That earns you referrals.