Rafi Mohammed

The Tao to Bigger Profits...Offer an Insurance Plan

Posted on July 15th, 2008 (1 Comments)

I recently called my local phone company, Verizon, to make a quick change to my long distance plan and ended up having the following discussion:

Verizon: “Do you own a telephone, computer, or television.”

Me: “Yes”

Verizon: “We are now offering an extended warranty for $19.99 a month that covers repairs on these products.”

Me: “Tell me more” (…it’s my vocation after all).

Now most people would be surprised to be pitched an extended warranty insurance plan by their phone company. I wasn’t…these insurance plans are “win-win” propositions for companies as well as consumers. I’ve read many a market research report that finds consumers highly value regular and extended warranty options. And for companies, offering an insurance plan is typically a license to print cash. In The Art of Pricing, I mention that extended warranties offered by the Dixon’s Group (Europe’s leading electronics retailer) and Comet (a rival electronics company) accounted for 47% and 80%, respectively, of their pre-tax profits.

I’ll characterize Verizon’s plan as “sort of” win-win. The few downsides for consumers are: (1) No guaranteed repair time, (2) Verizon has the option to offer a similar reconditioned product, and (3) There is a $75 deductible if Verizon decides to offer a payout (max: $2,500) to replace your product. Verizon’s downside is interesting. In highlighting the benefits of its insurance plan, the customer agent mentioned that I had the option to start or stop the plan at anytime. When I casually asked “why shouldn’t I just start the plan once an item needs repair,” he responded “you have to wait 30 days before you make a claim.” Sure, but if one were so inclined, there seems to be an opportunity to game this plan. After all…$19.99 + 30 days of waiting could = $2,500.

Of course, the consumer advocate lore on extended warranties is an unequivocal: “they aren’t worth it…it’s better to self-insure.” However, my friend (and economist extraordinaire) Patrick Degraba believes there are more benefits to an extended warranty plan than a strict “will my expected repairs be more than the warranty premium” analysis. Pat feels that extended warranties offer valuable peace of mind to consumers because they don’t have to search for a reputable repair shop or worry about being taken advantage of. He’s right…this is particularly true for extended auto warranties. Who amongst us feels that every one of their car repairs has been on the “up and up”? Extended warranties provide a clear incentive for service technicians to only make necessary repairs.

Whenever I meet a new company, one of the first questions I ask is “what insurance plans can you offer?” You’d be surprised at the wealth of opportunities that are available…so what “win-win” insurance plans can jump start your company’s operating profits?

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Readers' Comments on This Blog Entry

From Ross McDonald on July 15th, 2008
Interestingly, Dixons and Comet are owned by the same company. I'd like to see you explain how they compete against each other pricing-wise in a marketplace dominated only by them...