Only one in five people claim on their warranty, according to insurance provider MB & G. The company, which has been providing warranties for 30 years, also said it had heard of some dealers making a 100% profit on its products.
Top tips for selling warranties
Warranties – the legal view
Kevin Pearce, a director at MB & G, said: “Certainly there are significant profit opportunities to be made.
“In the majority of cases it is quite conceivable to make a 100% margin quite comfortably. I have dealers who buy our warranties for £100 and sell them for £200.”
However, Pearce said cases of dealers making a 100% profit were few because many were poor at selling warranties and treated the product like another feature.
This view was shared by Paul Hanna, commercial manager for Motorway Direct, which delivers the AA-branded warranty.
He said: “A lot of warranty sales are given away to close the deal and I feel more effort should be put into a programme to sell it.
“The spin-off is front-end and aftersales profit. We put in a lot of effort to make the benefits known to the dealer. We want dealers to see warranties as a profit, not a cost centre.”
Hanna added that in his experience people would pay more for a branded warranty, with dealers able to make 25% on each one.
He said: “We want to see our dealers make the most they can and they could make £200 on a 12-month warranty and £350 on one over a three-year period.”
The first step a dealer needed to take before entering into a contract with a warranty provider was to understand exactly what was covered and the procedure involved in making a claim.
Pearce said: “What never ceases to amaze me is that some people want the cheapest warranty and then complain it does not cover everything.”
Typically, a warranty will cover the engine, gearbox and drive train. But Pearce advised dealers to ensure the warranty was right for the vehicle.
Modern cars invariably have air conditioning and sophisticated electronics, all of which can go wrong and can be costly to fix.
Pearce said: “If a dealer’s stock does not have extras such as air conditioning and a full electric pack, or the cars are being sold at less than £2,500, it is unlikely they will want a comprehensive warranty because the cover is likely to include features vehicles in this price bracket do not have.”
One area where warranties can help was in engine diagnostics, which could be time-consuming and costly to repair, said Pearce.
This could create a good upselling opportunity, with many drivers unaware just how sophisticated a modern car’s electronics are and the cost involved in fixing them.
Epyx, which specialises in technology for the motor industry, said electrical faults were becoming more common than mechanical problems.
The company’s Service Network e-commerce platform is used by fleets with more than two million cars to buy service and maintenance from around 13,000 dealers, independent garages and fast-fits.
For dealers who enter into a warranty contract, Pearce said the most important question to ask was about the reimbursement rate of the warranty and situation on the parts?
He said: “It comes down to building a connection between the warranty administrator and dealer. If you want a cheap warranty you have to be prepared to reduce your labour rate.”
Pearce advised dealers taking the cheapest warranty to check the level of cover, what parts were included and to think about how satisfied the customer would be with the service offered.
Not surprisingly, the warranty companies AM spoke to were not in favour of dealers reducing their warranty work in favour of retail jobs.
In their eyes, warranties still provided a profitable revenue stream and helped with retention.
Long-term relationships with customers
Ian Simpson, sales and marketing director for the Warranty Group’s motoring division, said the schemes enabled dealers to create a long-term relationship with the customer.
He added: “Four out of five customers return to the dealer where they bought the car to make any necessary warranty claims and this increases the opportunities for the dealer to also capture routine service and maintenance work, sales of accessories and eventually a new car.
“If the dealer is able to satisfy the customer in all these respects, their chances of retaining that customer’s business are high. By contrast, customers for pure retail work tend to show much less loyalty to a dealer, often simply shopping around for the best deal.”
Philip Morrison, head of corporate sales at Car Care Plan, said that in most cases warranty work would make a profit, even at reduced rates.
He said warranties were about holding on to the customer because they encouraged people to return to the dealer.
However, what happens if the customer declines the warranty because their budget will not stretch to it?
Hanna said this came down to training and making the point that even new cars go wrong, which is why there is a manufacturer’s warranty.
It was about stressing a warranty built-in value to the package.
Once the benefits of selling warranties have been explained, how should they be sold and what support do the warranty companies offer?
The consensus is that warranties should be offered as early as possible in the sales process.
Pearce said it was crucial that dealers matched the warranty to the customer’s needs.
This should be qualified by asking how long the person intended to keep the vehicle and ascertaining what level of cover would suit their lifestyle.
Morrison, said: “It is down to dealer training. Even on a used car being traded in you should ask if it has any warranty.
“When you have a dealer network using a manufacturer-approved programme, that vehicle must have a warranty. If a dealer is selling a vehicle within a manufacturer-approved scheme it must have a 12-month warranty.
“If the customer has a warranty on their used vehicle the dealer should say they should ideally have one on their new vehicle.
“The earlier a warranty is introduced the more likely a customer is going to buy it. It is important to build in that peace of mind.”
Simpson said it was not necessarily where warranties fitted into the sales process, but how they were sold.
A framework was needed so dealers could maximise the opportunity.
RAC Warranty uses a programme called Critical Success Factors to ensure warranty sales were conducted in a structured and committed manner.This included ensuring staff selling warranties had a clear understanding of the products and benefits to the customer and created an incentive programme.
It also monitored staff to ensure they were offering warranties at appropriate times and providing suitable support so the scheme was successful.
Simpson said: “Where warranty sales are not reaching their potential, it is usually because there is a lack of commitment on the part of dealer management and a lack of understanding on the part of sales staff.
“As we have gradually rolled out Critical Success Factors across our dealers, we have typically seen an up-lift in sales of anything from 15-25%, which has provided very useful additional revenue to used car dealers during the recession.”
Car Care Plan has a support team to help dealers with everything from the sales process to making a profit.
MB & G also offer aftersales support, advise dealers on how to present a warranty and offer upselling tips.
One issue for dealers to consider is whether a branded warranty could be more appealing to customers.
Simpson said that despite the fact that many warranty brands were available, few were recognised outside the industry.
A respected name to a product which will give a customer peace of mind can prove to be a persuasive tool for dealers.
Simpson added: “The RAC name has proven crucial to increasing warranty sales over the last year. Dealers are telling us the same thing again and again. Customers worried about the credit crunch want a warranty that provides a high degree of reassurance – and they correctly trust that the RAC would only put their name to something highly dependable.”
Morrison agreed, saying customers would always have more peace of mind with a branded warranty and it could make the difference whether or not they took it.
He said: “If there is a difference in the price it will be justified for having that brand behind you.
“The benchmark we use is ensuring our products are competitive with others in the market.”
Hanna said people recognised the protection a branded warranty could give them.
For those dealers selling a vehicle with an AA warranty, Hanna said customers would be reassured by the fact that the vehicle was of a quality standard and would also give the dealer more confidence to sell it.
He said: “We provide all the branded information the dealer needs and it is much easier to sell an AA product because the customer has confidence in it.”
The AA also has regional development teams to help dealers who are in turn supported by the training division.
Hanna added: “We have people who come from a technical background to help with the whole claims process and work with sales staff to deliver sales support training and provide a benchmarking scheme.”
As a guide to the penetration rate Hanna said he would expect a dealer with 100 vehicles to be selling 40 warranties a month.
In addition, he said the brand’s support includes following up customers and offering other products such as GAP insurance.
However, even though a well-known name can help, research by Car Care Plan shows customers prefer a dealer to a car supermarket because they know there will be aftersales support.
The survey revealed that people thought a showroom gave them peace of mind and those looking for a specific vehicle would be prepared to pay more at dealers.
Mapfre Abraxas, an automotive insurance solutions company, has come up with a list of benefits of warranties to dealers and customers which are listed below.
- Maintain and grow relationships between dealership and customer.
- Increased customer loyalty.
- Easy to offer – professional approach.
- Ensures vehicle returns to your service department.
- Assists referral of cash customers.
- Additional profit centre.
- Assists sale of used cars, particularly as customers are keeping their cars for longer.
- No need for the concern of budgeting for repairs when every penny is important.
- Flexible protection for up to three years from purchase, allowing the customer to decide the right level of cover for them.
- Maintains re-sale value by enabling the customer to ºkeep their car in tip top condition.
- Roadside Assistance (where applicable).
- Car Hire (subject to Car Hire (subject to certain conditions).
- Hotel accommodation where applicable (subject to certain conditions).
Top tips for selling warranties
- Introduce the product as early as possible in the sales process.
- Qualify the customer’s needs and tailor the warranty to suit them.
- Make sure the customer knows what is and is not covered and knows how to make a claim.
- Make sure sales staff understand the benefits of a warranty and can convey this clearly to the customer.
- Clarify what support is available from the warranty provider.
- Have a sales structure so you know how many warranties each member of the team has sold and can help those who may be struggling to upsell a warranty.
- Ensure you know what information you must supply to the warranty provider in order to make a claim. Any problems will only delay the process
- If you want to take on a branded warranty ensure you understand the criteria a dealership must fulfil to take on the brand
- Consider introducing an incentive scheme for selling warranties
- Clarify exactly what the warranty provider can offer in terms of the labour and parts rates.
Warranties – the legal view
Lawgistics ,which offers legal advice to the motor trade, suggested dealers should consider the following when entering into a contract with a warranty provider:
- Choose a warranty provider who understands your liabilities and can give sound advice in awkward situations. Your warranty will only be as good as your warranty provider. It would be sad to see a good warranty let down by a poor administration service.
- Check the warranty provider and their warranty comply with the EC Directive and FSA regulations. Make sure they have a 24/7 claims helpline and administration service. If they can only answer your customers’ queries 9am- 5pm Monday to Friday, you could find you are administering your own warranties while paying someone else to do it.
- Although the level of cover in some warranties may look comprehensive this can soon change when you look at the exclusions.
Here is a list of typical exclusions:
- General maintenance and failures due to wear and tear
- Consequential damage or damage to parts covered caused by parts not covered
- Faults that were on the vehicle at time of purchase.
- Timing belts if no service history and not covered for damage caused by the failure of a worn-out timing belt
- Overheating damage, cracked blocks, cracked cylinder heads, burnt valves, oil and fluid leaks
- Recovery and vehicle hire.