Can a company use warranty to help drive sales? It sure can. Just ask Hyundai Motors. It saw its market share jump from 1.1% to 4% after it extended its powertrain warranty in 1999. You might also want to put the question to Volkswagen, which saw its sales drop 30% in the three years after it shortened its powertrain warranty in 2002.
What the Hyundai and Volkswagen experiences tell us is that to be successful in today’s marketplace a company must do more than make and sell high quality products; it must also provide a high quality customer experience. This has fueled warranty’s transformation from “necessary evil” to powerful tool for achieving high customer satisfaction. This in turn enhances a company’s reputation, builds its brand and helps drive increased sales revenues.
To fully appreciate the competitive advantage warranty can provide in connection with a company’s efforts to maximize future sales opportunities, it’s useful to understand how product warranties developed and how buyers perceive them.
The concept of warranty first took root in the middle ages. It sprung from the view that a seller has a moral obligation to stand behind the goods he sells. In 1274, philosopher and theologian Thomas Aquinas explained:
The third defect is in quality, as if one were to sell a sickly animal for a healthy one. If one knowingly does this, he commits a fraud that renders the sale unlawful. And in all such cases the vendor not only sins by effecting an unjust sale, but is bound to restitution. But if any of the aforementioned defects be in the article sold without the seller knowing of it, he is guiltless of sin; because, though what he does is unjust materially, yet his doing of it is not unjust: at the same time he is bound, when the fact comes to his knowledge, to make up the loss to the buyer. And what is said of the seller, is to be understood of the buyer also. For sometimes the seller believes his article to be less precious in kind than it really is, as when one sells gold for brass; and then the buyer, if he observes it, buys unjustly, and is bound to restitution. And the same of defects of quality and quantity.
(St. Thomas Aquinas, Aquinas Ethicus: or, the Moral Teaching of St. Thomas, vol. 2, question LXXVII, art. 4, at 93-94 (Summa Theologica – Secunda Secundae Pt.2, Rickaby Trans. 1986)). Now, warranty is treated as a legal obligation. In the law’s eyes a warranty creates a direct relationship between the manufacturer and the customer and creates obligations on the manufacturer’s part enforceable in court.
But it also does much more in the eyes of buyers. Research dating back more than 20 years shows that buyers view a warranty as a signal of both the quality of the product and of the firm that produces it. And buyers understand that warranty is a significant expense to a company. So in a buyer’s eyes the more robust the warranty, the more likely it is that they are purchasing a high quality product from a high quality firm.
By definition “warranty” means “promise,” “pledge” or “guarantee.” It assures the buyer that the manufacturer will be there to take care of product problems. For this reason, buyers have also come to place a high value on warranty because ot the protecton it provides against the risk of product failure and associated repair and replacement costs.
As the Hyundai experience shows, companies that have shifted their warranty focus from cost control to customer satisfaction have been rewarded with increased sales and higher profits. Making the shift requires collaboration between several groups within an organization, including sales and marketing, legal, finance, and public relations and communications. The challenge a company faces is to devise and implement a program that is not only consumer-centered, but competitive, cost-effective, and consistent with a company’s goals and culture.