The Contract Tier
If there is one definite trend in retail today—and it’s an unfortunate one—it’s that the margins on just about every product are eroding. Nowhere is this more apparent than in LCD TV, where the average selling price is dropping at a rapid pace, forcing retailers to sell more TVs to reap the same profits they made a year ago in the same category.
As most retailers know, a good way to ease the burden is to attach a warranty to the sale. It’s one of the best ways to get profit back to retail. So much so that extended services account for a lion’s share of national retailers’ operating profits. This has been true for a long time. But in CE nowadays, retailers have to be a little smarter about warranty management and sales, especially since the prices on electronics vary so widely, from multi-thousand dollar digital flat panel displays to $200 analog sets. Many now adopt a tiered warranty program, an industry practice that has been used for a while, but is still being ignored by some retailers.
The concept behind tiered warranties is fairly simple: you sell a higher-priced warranty on a higher priced product. “The reason you do it is so that you can have a consumer price competitive product offering for anything that you sell,” says Sean Hicks, president of Warrantech Consumer Electronics. His company has offered tiered extended services for many years, even on replacement programs. Hicks says they can have many tiers at one retailer or a few, depending on the kind of business the individual dealer runs, but the percentage is generally the same. “It’s been our experience that the consumer is willing to spend between 10 and 15 percent of the sale on an extended warranty.”