A not-so-secret secret is getting more attention than you'd really like after an article in BusinessWeek gave the world an inside look at how much money you and other electronics retailers make from extended warranties (sometimes called service contracts). The article explained that typically half of the warranty price goes to the salesperson as a commission and that only 20 percent of the total amount customers pay for warranties eventually goes to product repair.
You also know why extended warranties are such a profitable business. Many electronics products follow a predictable pattern of failure: a high failure rate early in their lives, then a "midlife" period during which failures go way down, and concluding with an "old age" period when failure rates ramp back up again (engineers refer to the phenomenon as the bathtub curve because it looks like a bathtub from the side-high at both ends and low in the middle). The early failures are usually covered by manufacturers' warranties, and the extended warranties you sell are designed to cover that middle part of the life span. In other words, many extended warranties cover the period of time during which consumers are least likely to need them and offer no coverage when consumers need them most. (Consumers can actually benefit from extended warranties in a few product categories, including laptop computers and plasma televisions. Of course, the more sense the warranty makes for the consumer, the less financial sense it makes for your company.)29
Your task: Worried that consumer will stop buying so many extended warranties; your boss has directed you to put together a sales training program that will help cashiers sell the extended warranties even more aggressively. The more you ponder this challenge, though, the more you're convinced that your company should change its strategy so it doesn't rely on profits from these warranties so much. In addition to offering questionable value to the consumer, the warranties risk creating a consumer backlash that could lead to lower sales of all your products. You would prefer to voice your concerns to your boss in person, but both of you are traveling on hectic schedules for the next week. You'll have to write an e-mail instead. Draft a brief message, explaining why you think the sales training specifically and the warranties in general are both bad ideas.