Service Agreements / Extended Warranties – Revenue Generator & Potential Differentiator

Distributors have been seeking opportunities to generate, or increase, their service revenue. While traditionally a complementary service for industrially-oriented distributors, construction-oriented distributors are also seeing opportunities. Some distributors have defined revenue goals, others look at this opportunistically (or give the service away to capture the product revenue.) While service revenue may not represent a significant (i.e. 10-25%) of revenues, it can represent a significant profit accelerator, a business differentiator and help capture product sales.

There are many types of services that distributors are familiar with ranging from engineering services, storeroom management, audits, job-site trailers, kitting, assembly, unique delivery solutions, project financing, rebate submittal and more. One area that most have not explored is extended service agreements (extended warranties) which, if the experience of many retailers is nominally replicated, could accelerate distributor profitability from the NAED reported range of 2-4%.  All while adding a potential differentiation tool to contractor customers and a longer-term budget insulator for other customers.

To learn more about the opportunity we solicited input from Scott Harryman at Power Assurance Solutions which offers extended service agreements to support manufacturers and develops solutions that are unique for distributors.  He shared these thoughts:

Consider when you buy an electronics item, or any product that is perceived as “sophisticated” and capable of breaking. The salesperson asks “would you like a service agreement with that? It only costs $X for a 1-2 year warranty extension.”  While you may not purchase, the small percentage of people who do say “yes” contribute significantly to the profitability of the offering company.

In fact, the Extended Service Contracts industry is growing at an annualized rate of 15-20% per year per. 

Why? Because buyers want security. 

Also, consider:

• Customers want assurance products are covered and know who will repair it
• The customer’s risk of absorbing unplanned cost after the original warranty expires
• The cost to do repairs continue to increase
• Technology continues to advance creating increased potential for failure (or the perception that it will fail)

There are similar comparisons, issues and opportunities with Electrical Distribution Equipment. 

Other industries have integrated programs into their offerings and offer extended service contracts at the point of sale, post-sale or through third parties which translates into incremental top and bottom line growth.

Distributors may be able to take a page from Best Buy. Best Buy is able leverage their Geek Squad business to promote service contracts.  They generate 60% of their earnings from just 5% of total sales revenue through extended service contracts and repairs.

While you may not have a “Geek Squad”, but what if your contractors were your Geek Squad? Your salespeople and marketing organization were your customer service and cash register associates?

Service contracts may represent a distributor opportunity for an additional revenue stream.… with electrical contractors being your salespeople and/ or companies (manufacturers) off-loading future liability to a service agreement.

The benefit for a contractor, or a manufacturer is that they can promote extended contracts to differentiate themselves and capture pre-paid service revenue for covered repairs.  

Adding extended service contracts can provide a distributor with a unique product offering to customers and one that can be offered through (selected) contractors while generating incremental sales and profits with no inventory and utilizing existing resources.

If you serve resi contractors, could this be a part of their service offering? Could you offer extended warranty, through the contractor or builder, for load centers, circuit breakers and other elements integrated into the panel?

For commercial projects, could an extended warranty differentiate a contractor come bid time? Could it differentiate you if you already have a competitive price? Would a manufacturer be willing to co-fund to help earn the product sale? 

And remember, these are extended service contracts (warranties).

To make it “contractor-friendly”, you can either ensure that the work will be conducted by the contractor, by a select group of contractors that you partner with or you can have the work handled by the manufacturer.  Your choice!  

The customer’s benefit:  these contracts hedge against future negative financial impact for the end-user, bringing greater predictability to their repair budgets while enhancing performance and accountability.

And it can extend the perception of the contractor’s warranty coverage of “one year”.

Distributors, Contractors, and Manufacturers can utilize extended service contracts depending on the project, specific equipment, or types of customers. There is no limitation or requirement, but provides a defined program in how to manage request while delivering value to all.    

An extended service program:

• Streamlines the warranty process and takes on the financial risk, resulting in faster repairs for the end-customer.
• Service can be delivered by the Manufacturer or an electrical contractor
• De-risks the project for Contractors, End Customers, or Manufacturers
• Manufacturers don’t have to find ways to manage or provide for extended coverage, but reap the benefits
• Addresses project delays and expiring warranties
• No investment – No Inventory – No distributor cost – Incremental sales & profits!

Third-party extended service contracts for electrical distribution equipment can be a winning proposition for covering unplanned repairs beyond the original warranty.

Extended service agreements represent an opportunity for a distributor to differentiate themselves, offer something “unique” within their market and generate additional sales and profits. Moving forward, diversifying revenue streams while adding value to customers can help drive profitable growth.

Recognizing an opportunity for distributors, Power Assurance Solutions created the electrical industry’s only independent program to provide protection for all makes and models of electrical distribution equipment. To learn more, contact Scott Harryman or call him at 1-832-433-7330 x 701.  Whether you represent one manufacturer or multiple, distributors now can provide a single service coverage solution to their customers through Power Assurance Solutions.

The interesting part of this opportunity is that it is not limited to large / national chains who frequently can leverage their size and customer base to develop / offer these types of services.  Independents can offer this service and, perhaps more importantly, this endeavor could be further promoted through selected contractors enabling distributors to further strengthen relationships with key customers and help them win increase their business.

A challenge for many distributors becomes “who is responsible for this type of initiative?” While it does not fall into purchasing and does require executive leadership / interest, sales should be the driver with support from marketing. Over time, or based upon commitment, a company may appoint a services manager (or similar) to drive awareness within their organization and to identify opportunities within selected customers.

As you begin planning for 2018, consider how you can improve your profitability through service revenue.  Talk to customers, train your sales organization, develop the marketing messaging that focuses on customer benefits and set goals. Services can help you differentiate when they are presented to the “right” level within your customers / prospects.