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Selling Warranty Contracts

Why you should make service a part of your sales pitch.

The automobile industry has sold tens of millions of extended service/warranty contracts to customers through their dealers, realizing profits in the billions.

The material handling industry, and forklift dealers in particular, has barely scratched the surface when it comes to extended service contracts and have been missing out on the enormous profit potential.

That is changing. Selling standalone extended service programs to customers can provide dealers with substantial revenue, enhanced forklift maintenance programs and improved customer retention.

What Is a Service Contract?
A service contract, sometimes referred to as an extended service plan or extended warranty, gives purchasers of consumer electronics, appliances, home systems, recreational vehicles, motor vehicles, forklift trucks, etc. the option to protect their products and investments beyond the terms provided by the manufacturer or seller. Service contracts often provide benefits not otherwise available in a manufacturer’s or seller’s warranty. Service contracts offer flexible benefits that can include product repairs, complete product replacement, technical support and emergency repairs and service. In addition to product and purchase protection, service contracts provide consumers with convenience, time savings and peace of mind.

Who Sells Service Contracts?
Service contracts are sold by representatives from a wide array of industries. Many service contracts for homes are sold primarily by realtors. Service contracts for motor vehicles, RVs, power sports and forklifts are sold by dealers and their employees. Service contracts for consumer products, including digital cameras, cell phones, appliances and other electronics, are generally sold by the retailers who market these kinds of products. Service contracts are also available from independent companies through the Internet. Literally millions of service contracts are sold annually in various industries. For example, over 10 million motor vehicle service contracts are sold each year.

Material Handling Contracts
For forklifts, most manufacturer warranties provide for one year or 2,000 hours of basic coverage, usually with a two-year extension available on powertrain only. However, there are forklift dealer service contract programs available that can protect the customer for up to four additional years or 6,000 hours and cover up to 150 components (not just powertrain).

Used lift trucks typically have only a 30- to 90-day dealer guarantee. Now, forklift dealer service contract programs can provide up to two years or 2,500 hours of coverage on used forklift trucks.

Benefits to Dealers
An effective service contract should provide a host of benefits to dealers of material handling equipment. First and foremost, the contract should help increase equipment sales. Service agreements can be used as a competitive advantage over other dealers when presented to the customer. Plus, each contract itself generates income. Thus, the contract is a driver of substantial revenue to the dealership. Service contracts, though, aren’t merely limited to new equipment. Dealers can offer them on used, rental and leased trucks as well. This can help eliminate the customer’s fear in purchasing or renting older equipment. The end-user gets a guarantee, which should result in improved customer retention.

In addition, forklift maintenance programs can be enhanced with a quality service contract program, particularly for dealers who carry their own self-insured maintenance programs. Typically, when claims occur, a self-insured dealer has to account for “the promise to pay,” creating a contingent liability on their books, which suppresses their profits. A service contract reduces the contingent liability exposure on a self-insured maintenance program.

What Dealers Should Look For
Before making the plunge to make such contracts available to customers, there are several key points material handling dealers should consider. Examples include:

  • Is the program fully insured?
  • Is the provider or administrator reliable and financially secure?
  • Is online quoting available? If so, is the online program automated?
  • How fast are claims paid? Is the dealer’s labor rate honored in claims? Are manufacturer’s retail prices for parts paid on all claims?
  • Is the service contract able to be serviced by other dealers anywhere in the country to ensure national service for the customer? Is reliable customer service available on a national basis?
  • Is dealer training available? Many dealers do not yet know how to sell these programs.
  • Are the service contracts priced reasonably? Is sufficient dealer markup allowed to maximize profitability?
  • Is there an additional dealer incentive program?
  • Are the service agreement terms for used lift trucks appropriate? For instance, will they include trucks at least five years old with up to 8,000 hours on them?
  • Are the claims exclusions on the contract reasonable? For example, normal wear and tear is usually excluded.
  • Are there deductibles? If so, are they low? Most are only $100 per claim.
  • Are there any other restrictions in paying claims, such as maximum payouts, limits, etc.?
  • What classes of forklifts are eligible? Which are not?

Knowing the answers to these questions can help determine if extended service contracts are right for your dealership and, ultimately, your customers.

Material Handling Equipment Distributors Association
George Schmid John Burkart Meet the Authors
George Schmid and John Burkart are both vice presidents of the National Specialty Programs division at Edgewood Partners Insurance Center (E.P.I.C.), located in Orange, California, and on the Web at www.edgewoodins.com.

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