By Roland Bydlon, P.E., MBA
Catherine Roe, an executive at Google, defines it as the “zero moment of truth.” It’s the instant when your customer decides to buy your product or your competitor’s. The customer has done the research, talked to the “experts,” figured out what’s needed, looked at all the products he thinks will meet his needs, compared prices, and then made a decision.
What drives this decision? Is it price? Is it the reputation of the manufacturer? Is it the personal relationship the salesman has made with the customer? Depending on the value of the product or service, it is probably all of these.
Peace of mind – the customer’s sense of confidence that he or she made the right choice – is an intangible that is also a factor in the decision to purchase. In some cases, peace of mind is the most important determinant. A customer will often pay a higher price for a product if he or she knows that the company stands behind it. Without a warranty, the buyer takes all the risk.
Five viewpoints on warranties
Scott Flood, a marketing and advertising consultant, suggests offering a warranty for your product or service for many reasons. According to Flood, after the advertising has caught your customer’s attention, your sales pitch has delivered the details and your pricing has nearly sealed the deal, a warranty could remove any final barriers to making the purchase – especially if one of your competitors is offering one.
Flood says there are two reasons why many companies don’t consider offering a warranty. The first is because they don’t have a high level of confidence in the quality of their product. If that is the case, there are bigger problems to address. The second reason is because they are afraid dishonest people will take unfair advantage of them. While there are dishonest people out there, he maintains that you cannot shut down your business because of a small percentage of customers. You need to accept that there is risk to doing business and create an allowance for some potential loss on your books.
If the seller is willing to take some of the risk, the customer may be more willing to buy the product at the moment of truth. So what is the value of a warranty? If you are already making a quality product, why should you offer one?
A warranty helps establish and solidify a relationship with key customers. Greg Stratis, manager of Shea Concrete Products in Amesbury, Mass., offers a limited warranty to customers buying his underground water tanks. The warranty states that the product will not fail for 30 years due to natural external corrosion or internal corrosion if the tank is used solely for water.
John Mion, vice president at Central Precast Inc. in Ottawa, wrote the following: “A warranty is only as good as the company that is going to back it up. As a CSA1 certified precast producer, we are required to provide a minimum five-year warranty, unless otherwise specified, on all precast architectural/structural products. For masonry accessories such as sills, lintels and banding, a one-year warranty is typical. However, because of our certification and QC procedures, we have been fortunate that we have only had a few small warranty-related issues over the past 55-plus years. Even if the issues showed up after the five-year period, we found it was better PR to just repair or replace than to argue fault. This type of approach gets you more long-term clients than all the advertising you could do. Since there are so many competitive products out there, we feel it is important to provide a good warranty that is well backed. It also sets us apart from the fly-by-night precasters who undercut the market just to get a job.”
David Miller, product manager at Weaver Precast in Tampa, Fla., stated, “We produce the Superior Walls below-grade foundation system and offer a 15-year warranty. This definitely helps drive business, because so few systems are willing to offer such a long warranty.”
Sam Lines, safety engineer and lean coordinator at Concrete Sealants in Tipp City, Ohio, added “In my past life with a precast producer, we offered a five-year warranty on a septic tank and, if I recall correctly, a 10-year warranty on a controlled-environment vault. In my decade of overseeing quality management, we did not replace very many units, and we had a very low warranty repair rate.”
So let’s review a bit. If you know you have a good product (critical assumption), offering a warranty will help you build trust with key customers. Those customers will say “yes” more often at the zero moment of truth. You will sell more product and have happier customers who are more likely to tell others about your products since not very many companies in the industry offer comprehensive warranties.
Warranties sound like a good strategy, but many owners of small and large businesses are skeptical, saying they are in a business-to-business market and service is no longer valued in this economy. However, offering a warranty program requires understanding your market, knowing your products and managing risk. Some common producer questions:
1. Can I charge extra for a warranty?
2. How long a warranty should I offer?
3. How do I know how many products will fail?
4. How do I justify this program to my CEO or my accountant?
5. How will this grow my business?
In order to answer these and other questions, let’s introduce a hypothetical example using fictitious names. Keep in mind that every business is different, and there are no answers that apply to every situation, but hopefully this scenario will facilitate conversation about ways to grow your business and compete in innovative ways.
A hypothetical case: Panther Precast
Joe Salem, the CEO of Panther Precast, started his company more than 30 years ago. The company makes a variety of products including septic tanks, catch basins, manholes, utility vaults and specialty concrete products, about 50% of which are septic tanks and distribution boxes sold to a number of installers.
Quality precast product but no warranty: The company is profitable, but growth has been very slow over the past few years due to the slowdown in home construction. Panther is well respected in the industry and makes a high-quality tank that exceeds ASTM standards but does not offer a written warranty. Joe’s son Bob, the operations manager, said they will stand by their product. “If something is wrong we will fix it.”
Market competitor offers warranty: Panther has always lost some business to tanks of low quality, but lately several installers in the area have begun selling the Plastitank line of plastic septic tanks. The manufacturer of the tank claims it is better than concrete, because it will not corrode and is much easier to install. Additionally, the manufacturer is offering a 10-year warranty against system failure. One of Bob’s installers said that customers are buying Plastitank, because they think it is higher in quality and more reliable than concrete. He asked Bob if Panther would be willing to match the 10-year warranty, otherwise he may recommend to all of his clients that they buy the Plastitank product.
Joe and Bob are deciding how to react. Joe has never offered a warranty and doesn’t feel he needs to. “My word is my promise.” They are confident that concrete is far superior to plastic. But the reality is that Panther is losing business.
Considering a product warranty for the first time: Bob’s son Travis, who has worked at the plant since he was 16, has just returned from his first year in business school. Travis knows Panther makes a good product and that its tanks last a long time. He also knows that if customers want a high-quality product, they would be interested in considering concrete. If a customer wants a warranty, Panther should be able to offer one – but first he will need to understand how long Panther tanks last historically, what their failure rate is and how to predict the failure rate going forward.
How to determine length of warranty: Travis figured that the average life of a Panther tank, installed and maintained correctly, is 20 years. He also determined that a plot of the number of tanks failing per year followed a standard normal distribution curve (see Figure 1). In mathematical notation, μ is the mean of the distribution, and σ is its standard deviation.
Looking at some records of tank failures, Travis estimates that the standard deviation under the curve was 2.5 years. In statistics the 68-95-99.7 rule states that for a normal distribution nearly all values lie within 3 standard deviations of the mean. If N = 20 years and 2 σ = 5, this means that about 97.8% of the tanks will last longer than 15 years.
If Travis offers a 15-year warranty and the failure rate continues to hold to this normal distribution, he could expect about 97.8% of tanks to be operational at 15 years. If we were to draw a vertical line at -2 σ the area under the curve to the left of this line is the failure zone, or in this case, it would be 2.2 tanks out of every 100. Statistically, 2.2 Panther tanks out of every 100 can be expected to fail before 15 years (see Figure 2).
Cost of warranty: The cost of a 15-year warranty for each tank statistically would be the cost of replacing just 2.2 tanks for every 100 tanks produced. If we were to offer a 12.5-year warranty (N-(3*σ)), there would be almost no area under the curve. The shorter the warranty, the fewer expected failures and less the expected cost.
Assessing customer base and product market share: Travis understands that there are three different kinds of customers (Figure 3) who have unique wants and needs:
1. A value customer who desires a tank that meets minimum requirements (Product A). Panther does not currently have a product in this area.
2. A customer who wants a better tank and is willing to pay more for it (Product B). This is Panther’s current product market.
3. A customer who wants the best and values a warranty. This customer does not want to worry about the tank and is willing to pay extra to be assured that if something happens to it, the installer will make it right (Product C). This is the customer Plastitank is appealing to. Panther currently does not have a product in this area.
Two different products: Travis reasons that Panther needs to focus on what they do best. For 30 years Panther has delivered high-quality products. They never intended to make a tank for everyone, but they want to serve their market and exceed the expectations of their target customer.
• Recommendation #1 – Create a new product to compete in market C. The launch of Plastitank has validated that there is a customer in the marketplace who will demand and pay for a tank backed by a warranty. Panther has a “better” tank and confidence in at least a 15-year service life (see Figure 4). Travis recommends that Panther develop a “best” tank by adding an admixture to the concrete during the manufacturing process that will decrease permeability and increase the tank’s resistance to water and corrosive materials in the tank. In addition, he recommends giving this tank a 15-year warranty. The cost of the admixture and the warranty can be added to the price. This will allow Panther to compete head-to-head with Plastitank. In his opinion, the customer given an equivalent warranty will choose concrete over plastic.
• Recommendation #2 – Leave market A for others. Panther has positioned itself as a quality brand. Capacity at the plant is limited and should be directed toward areas where quality and service are highly valued. Travis recommends leaving the base product for others to manufacture and sell.
There are customers who want and are willing to pay extra for the peace of mind that a long-term warranty offers. Some customers view a product warranty as an indication of product quality, especially where customers (including regulatory agencies) have difficulty assessing product performance – for example, durability relative to concrete compressive strength. Producers of high-quality precast concrete tanks can offer warrantied products targeted to this customer group to grow their market share and improve business.
Roland Bydlon, P.E., MBA, is NPCA’s vice president of Technical Services.