05.15.2007 — There is little doubt that selling extended service plans (ESPs) is profitable. According to Warranty Week magazine, retailers Circuit City and Best Buy clear between 40 percent and 80 percent profit on their sales of extended warranties. Consumer Reports claims that Gateway earns twice as much on extended warranty contract sales as it spends to service those items.

No wonder Wal-Mart announced a major initiative to sell ESPs for its electronics last year. Meanwhile, the Wall St. Journal reported last year that almost all of Sears’ profits came from the sale of extended service plans (ESPs). Need any more evidence that these are lucrative?

But what about their place in the custom installation industry? Integrators can hardly be expected to sell ESPs for a complex installation that interconnects numerous subsystems. It would be a paperwork and potential service department nightmare, wouldn’t it? Not necessarily.

At least one third-party warranty company has developed an “umbrella” ESP program catered specifically to custom installation. The program allows an integrator to package multiple pieces of electronics under a single service plan, making it easier to sell. Plus, the plan is sold to the customer for twice the amount the integrator pays for it … an immediate 100 percent return!

Moreover, the plans are administered by the third-party warranty company, eliminating the need for an integrator to establish his own service department.

Finally, if an integrator is an authorized repair company for the equipment, there’s a potential double whammy: He can not only earn revenue from selling the initial contract, but also by doing the repair work.

So if this is such a great deal, why do 56 percent of integrators report that they have never sold extended service contracts?

To find out the answer, CE Pro conducted an original research survey among custom integrators to get a handle on the issues surrounding extended service plans, such as types of included products, terms, costs and other administrative concerns. Among the highlights are:

• 80 percent of integrators are willing to use a third-party warranty company to administer their extended service contract business.
• 56 percent of integrators have never tried to sell extended service plans.
• Among integrators who sell ESPs, the typical price is less than $100 per component.
• In a typical custom installation, integrators estimate that between three and five products per project could be covered under a single “umbrella” ESP.
• On average, most integrators estimate that they charge clients between 6 percent and 15 percent of the total job cost for an ESP.
• The typical term for an ESP is three to five years.

What Is an ESP?

The terminology can be a bit confusing, so here’s a basic primer. An extended service contract is neither a maintenance contract nor a manufacturer’s warranty. When an integrator sells and installs a system, many of the individual products carry manufacturer’s warranties, typically ranging from 90 days to one year. Also, a maintenance contract is a separate agreement sold by the integrator that covers tasks such as calibration, cleaning and programming updates.

An ESP is a contract that covers an individual component (or multiple components) beyond the expiration time in the manufacturer’s original warranty. ESPs are often administered by third-party warranty companies.

(Sears calls them “maintenance agreements” and the company sells them in one, two- and three-year terms, with an option for the customer to renew the agreement at the same price after three years, but they are really ESPs.)

Why should you sell them? There are several reasons, including profit, customer loyalty and competition. But most customers are suspicious of ESPs because it brings into doubt whether or not the product is reliable. Indeed, most products are not likely to “break” within three years of the initial purchase. That’s why an “umbrella” contract that covers multiple components seems to make more sense for integrators.

“We were the first to market four years ago with a pre-packaged extended service program for custom installers,” says Sean Hicks, president of Warrantech Consumer Product Services (consumer electronics). Warrantech is a 24-year-old company that recently went private after receiving an investment backing from HIG Capital and AmTrust. The company also offers extended service plans for jewelry, furniture and appliances.

“Never use an ‘Oh, by the way’ sales technique when trying to sell extended service plans,” advises Hicks. “Make it part of the initial proposal, saying something like, ‘As part of your system installation, you will get a three- to five-year extended service plan.”

Hicks advises integrators to put the cost of the plan into their labor charge to the client, or separately break the cost out of your labor line item.

“Another $1,000 on top of a $25,000 installation is not a lot for the buyer for three to five years of protection.” In the case of Warrantech, its packages are sold in tiers, based on the cost of the system installation. For example, for a home theater system with component costs between $7,500 and $10,000, an integrator can purchase an ESP for $650 from a distributor.

The recommended resale price is $1,300 … a 100 percent markup. Warrantech ESPs are sold through distributors that include ADI, DBL, Digital Delivery Group, Gotham and Mountain West. In order to purchase the plans directly from Warrantech, an integrator must sell a minimum of 500 per year. The plans do not cover cables, remote controls or cabinetry.

Once the plan is sold, the client (or the integrator) must register the system online, itemizing all the gear. If a failure occurs, clients are instructed to call an 800 number or go online. The third-party administrator (like Warrantech) then dispatches an authorized repair company (which may or may not be the installation company).

“I recommend that you get into the repair business,” says Hicks, adding that it creates a solid revenue stream.