Embracing the trend toward extended service agreements

The demand for extended service agreement (ESA) products continues to grow and this growth is fueled by both contractors and homeowners. Homeowners have been conditioned to be offered some sort of extended warranty product on just about anything they buy, from appliances to phones and just about anything else. That conditioning has made its way to the HVAC, refrigeration, plumbing and electrical industries.

Homeowners are asking contractors if they offer extended labor options with their installations and contractors look to distributors or third parties to serve their customers’ needs. More often, contractors are including extended coverage with their new equipment installs to stand out from their competitors, and competitors are responding by doing the same.

What happened to OEMs in the 1990s, where we saw manufacturers expanding their parts warranty to keep up with competition is happening today with contractors. Before the 1990s, a 10-year parts warranty didn’t exist. By the end of the decade, most major manufacturers were offering 10-year parts with registered equipment.

It seems natural that the one who sells the equipment would be the one offering the extended coverage for that equipment. The majority (45%) of all extended coverage sales take place at the point of sale, which from the contractor’s point of view would be the distributor, as they are selling the equipment. This demand has not gone unnoticed. The majority of distributors today offer some type of extended coverage program to their customers.

WHY OFFER THEM?

Distributors list a variety of reasons for offering extended coverage options to their contractors. First on that list is meeting the needs of their contractors. Good customer service is key to keeping contractors happy and being the distributor of choice. When contractors are looking for extended coverage options on their equipment and the distributor can’t accommodate, there is a risk they may look to a distributor who can.

The next reason shouldn’t be a surprise: Profit. Offering extended coverage can be very profitable. Many distributors started offering coverage to meet the needs of the contractors but ended creating a separate department, and view extended coverage as its own separate profit center. This should come as no surprise as some of the big box stores that specialize in appliances and electronics list extended warranty products as the source of almost half their profits.

Another huge advantage is that these products require no inventory. Unlike most products distributors carry, there is no chance you will run out of these products or have issues with supply chain. The products are offered at the point of sale and require no initial investment. This means they won’t negatively affect your inventory turn rates; they will actually improve it as sales grow, and they won’t tie up your working capital.

The ease of offering these products is also on this list. Technology has come a long way since these products first made their way to the trades. Today, industry leaders like Trinity offer plug-and-play solutions and can customize programs to fit the needs of every distributor. Some distributors simply serve as referral partners to accommodate their contractor’s needs, others go the white label route and have a custom program built for them and call it their own. In both cases the providers serve as the administrators and handle the claims and the post-sales process.

WHAT TO EXPECT

Offering these products begins with a discussion with your provider, where they will get a better understanding of your needs and go over various options available based on those needs.

These include:

How you go to market;
List of equipment that is eligible for coverage; and
Determine wholesale pricing and distributor markup.

What follows is program development and custom portal setup. Depending on the direction a distributor takes, they can be ready to offer extended coverage to their customers in less than 30 days.

After a distributor is set up, they will begin the process of letting their contractors or dealers know that extended coverage can now be purchased through them and enroll dealers into their program. Once enrolled, contractors can place orders in one of two ways, either at the distributor’s counter or through the distributor’s portal.

Transactions can also take place in two ways. The transactions can be handled by the distributor, just like they are for every other product they carry, by developing SKUs for every coverage type they will offer and uploading them into their system. Another route is the provider collects the payment for the coverage, relieving that burden from the distributor, which tends to be the route most take.

Once the sale has taken place, the post-sales process is handled by the provider. When the contractor needs to file a claim they log in to their portal, where all their agreements are stored, and they file the claim in the portal. The provider adjudicates the claim and reimburses the contractor.

HOW TO CHOOSE A PROVIDER?

Picking the right partner is important. There are a few key characteristics to look for. First the provider needs to offer quality coverage and have oversight. Make sure your provider works with an A rated insurance provider and that they undergo an independent audit to make sure your coverage is properly reinsured by an insurance policy.

Second, make sure the provider has the technology in place to make your life and the life of your contractors easy. The last thing you want to do is to create a headache for your employees and your dealers. Make sure your provider has the team and the infrastructure to accommodate your needs from portal creation to custom integrations with your system if the need arises.

Third, make sure your provider has financial stability and has built their products to account for the industry’s past failures by taking precautions to protect their distributors and their dealers. In addition to using A-rated insurance partners make sure they are backed by at least two, if not more, A-rated insurance companies, in case one insurance company decides to stop underwriting policies.

Flexibility is last one on this list and should not be underemphasized. Some providers have a box that they ask you to fit in and don’t have the means or choose not to deviate from that box. Some will only offer Plumbing and/or HVAC and are limited by equipment size or type. So I will leave you with a few questions you should consider asking a prospective provider: