What’s Wrong with Working with an Extended Warranty Company?
While working with a few shop clients recently, I discovered a problem they were having with a particular customer. Not a specific customer by name but a “type” of customer.
The type I noticed was the extended-warranty, service-contract customer. The problems involved insurance products this type of customer had purchased through new- and used-car dealers or bought as a result of offers they received in the mail or online. The product itself provides protection for expenses incurred due to unexpected vehicle repairs.
No wonder so many vehicle owners choose to buy this protection. It’s a good investment. So why are the shops having problems? Because the work they do for customers with those service contracts isn’t profitable. In fact, it’s less profitable to the point that this segment of repair work is preventing the shops from achieving their sales and gross-profit goals. The volume of work is correct but not the pricing.
One of my clients told me he was ready to stop working for customers with service contracts. Not a good idea. Telling a customer they made a bad investment is like telling a mother she has an ugly baby. There are enough challenges in attracting customers today that turning them away would be a terrible reaction.
Besides, the issue is not about dealing with vehicles covered by a service contract. It’s about shops deviating from their established pricing strategy when selling the work. They’re accepting what the service contract administrator offers to pay for the labor and parts. In essence, shops are allowing the insurance company to become the customer. They’re telling you to give them discount pricing for your knowledge, experience, talent and quality of service.
Should a shop allow a third party to influence their prices and profits? Never, never, never! First, the insurance company doesn’t know anything about your business. Second, and most important, they know nothing about the profit strategy you’re using to pay the bills and provide a return on your investment.
What really happens in these sorts of transactions is that the insurance company applies their profit strategy to the auto shop business. OK, they’re in the business of making money, just like you, and their profits come from managing risk and exposure, and from controlling costs. But they do this by dictating to shops the labor rate and parts markup they’ll pay for the repairs they’re responsible for in the service contract.
I asked shop owners why the repair work covered by service contracts should be less profitable than the same repair work paid for by vehicle owners. No one could give me a reasonable answer – because there is none. The shop will use the same quality parts, perform the same quality work, use the same talent, accept the same liability and provide the same warranty in either circumstance.
Some of those shop owners and I worked up a solution to the problem. We created a standard operating procedure for working with service contract plans. In summary:
- The vehicle owner is always the customer, never the insurance company.
- The vehicle owner is informed that the shop will work with the service contract administrator and represent the vehicle owner.
- All work will be explained to both the vehicle owner and the plan administrator.
- The plan administrator will be given an estimate for the repair.
- All estimates will include parts priced by the shop’s parts markup matrix and labor calculated with the usual labor time adjustment and labor rate appropriate for the skill level of the procedure.
- The shop will obtain an authorization of the amount the insurance company will pay.
- The vehicle owner will be advised of the amount the insurance did not cover that is their responsibility.
- With the authorization of the vehicle owner, parts are ordered and the repair is performed.
Using this plan, we agreed, a shop can provide its customers with a no-hassle, frustration-free, exceptional experience.
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