Information & Communication Technologies

Retail Product Protection: Optimizing the Customer Experience through Stability

by Brent Iadarola 15 Apr 2015
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Frost & Sullivan’s research indicates that roughly one in five retail customers that have purchased an electronics device or a major appliance are likely to have a problem with the product within the first 12 months. While retail protection programs cannot prevent a problem, they can certainly provide a defined path for consumers to resolve their product issues by providing assistance to repair or replace their covered product (even after the expiration of the manufacturer warranty). With growing awareness of the need and utility of retail protection plans, Frost & Sullivan estimates the total US retail product protection market in 2014 approached $10 billion across consumer electronics, appliances, jewelry, sporting goods, furniture, and other product categories.

The Ecosystem of Retail Product Protection

At a high level, typically there are three central entities that are involved in the retail market protection ecosystem:

• Retailers: The entity selling the retail product protection plan to consumers. This includes retailers that offer either self-managed or third-party-managed retail product protection plans to their customers.

• The Administrative Service Providers (ASP): The entity obligated under the plan terms to provide the service. The ASP is responsible for delivering the protection services and must evaluate, investigate, and settle claims. The ASP is commonly known as the Protection Plan provider.

• Underwriters: The insurance companies or obligors that cover the service contracts. The underwriters endeavor to ensure that the risk associated with the service plan is priced appropriately and provides assurance to the customer that service contract obligations are met.

The importance of a healthy relationship between these entities is critical in order to maintain stability and consistency. Any disruption in the ecosystem can adversely impact the predictability of the future customer experience. As Eric Arnum, editor at Warranty Week states, “Changing an underwriter can be incredibly disruptive for the retailer, and doing so frequently is a red flag in itself.”

Pricing Risk: A Source of Friction

ASPs that support a wide range of products (i.e. consumer electronics, home appliances, lawn and garden equipment, power tools and equipment, jewelry, etc.) are often attractive to retailers that prefer to partner with a single entity to cover multiple product categories. However, each product category has a fundamentally distinct servicing experience, which makes it extremely difficult to predict costs and determine the associated pricing for protection plans.

Issues can emerge when the cost of the protection outweighs the price of the protection plans. For example, the Global Warranty Group (GWG), an administrative service provider for mobile handset protection, was forced out of the industry because their prices for device protection were not sustainable to cover costs. Essentially, GWG underpriced its risk and charged less money than it cost to service the protection plans they were selling. Any retail protection plan’s success hinges on whether the cost of the program is appropriately covered. In the case of GWG, the risk was not properly priced.

The ability for actuaries to anticipate costs to determine accurate pricing has only become increasingly complex. For instance, ASPs are obligated to evaluate, investigate, and settle claims under the terms of the respective service plan. If the claims are valid, the ASP must service them. If they are not, ASPs are obligated to decline them. A conflict (with the underwriters) can arise when an ASP pays out too many claims in order to generate positive customer ratings or sentiment. This was an issue in a ’14 dispute between SquareTrade Inc and AmTrust North America Inc (SquareTrade’s former underwriter) where the allegation was made that there was “…a conflict of interest between [the] duty to evaluate, investigate and adjudicate claims… and the desire to keep customers happy.”

Says Arnum, “The underwriter can make assumptions about how likely a person is to drop his phone, what sort of damage will happen when it is dropped, what repair would be required, etc. But what they cannot price is the idea that the administrative service provider will always say ‘yes’ to customers to keep them happy.”

Questions to Ask Prospective Partners

Retailers can improve customer loyalty, increase store visits, and enhance revenues with the ‘right’ retail product protection program. However, identifying the optimal partner is no simple task. “Retailers want an uncomplicated arrangement, predictability, quiet and smooth operations, stability.” says Arnum. That is not always easy to find. So what are the important questions for retailers to ask when evaluating prospective retail protection partners?

1) Are you profitable?

Profitability, plain and simple, means that companies can correctly price the risk and ultimately make money from protection plans. Incorrect pricing of the risk leads to losses. Retailers need to simply ask, “Are you profitable?” And if they say that they cannot comment on profitability matters, then that should really be the end of the conversation.

2) How long have you been in business? (And, more specifically, how long have you been in particular product categories?)

Retail protection is a complex business, particularly as providers expand to new product categories. Some expand too quickly and do not have the servicing infrastructure to adequately support new product categories. Longevity is an indicator of experience in navigating business cycles and changes in products and technology.

3) How many times have you been ‘married’?

“Think of the relationship between the administrator and the underwriter like a marriage,” says Arnum. “So one of the key questions retailers should ask a prospective administrator provider: ‘How many times have you been married?’ If an administrative service provider is on their fifth underwriter in three years, for example, then that could be a problem. Most [administrative service providers] should have one or two underwriters for life.”

The Final Word

Retail product protection plans have evolved to provide integral tools for retailers that want to enhance customer loyalty and generate incremental category sales. In order to optimize customer satisfaction, retail product protection programs must consistently deliver efficient claims, repair and replacement services across product categories. This must be accomplished in a prudent and profitable manner. While on the surface most retail protection providers seem very much alike, there are often clear differentiators ‘under the hood’. To succeed in the space, profitability, longevity, and stability should be the fundamental prerequisites for a prospective retail protection partner.

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