On this episode of Dear Strategy, we analyze how customers feel about products that fail outside of their standard warranty periods but long before their normal expected lives. Is it a smart strategy for companies to stick to those 1-year warranties, or should they be exploring a different approach that focuses on long-term customer loyalty over short-term cost avoidance?
Back in Episode 113 of the podcast (and blog), I shared a story about my refrigerator and how it had failed after only 5 years. The main issues I wanted to discuss in relation to that story had to do with companies adding a whole bunch of bells and whistles to their products that effectively cause the lives of those products to be shortened. But there was a secondary issue that I promised to address on a future episode, and that had to do with companies offering standard warranties that were far shorter than the expected lives of their products, no matter how much technology was incorporated into them. So that’s the strategic question that I want to talk about today…
Almost every product you purchase comes with some type of warranty that covers any defects in manufacturing or design that show up within a certain period of time. Usually, that warranty period is in the neighborhood of one year, after which time you’re pretty much on your own if something goes wrong. In other words, by the letter of the law, the manufacturer would have no obligation to do anything for you outside of their stated warranty period. There is some reprieve regarding blatant safety issues (such as those that might be covered by a product recall) or other implied statements of reliability. But, for the most part, if a product fails anywhere outside of its standard warranty period, you’re pretty much out of luck.
The problem is that, everything else aside, most customers have some expectation of how long a product should actually last, regardless of how long the stated warranty period is. And that expectation is usually derived from some combination of how effectively a product has been marketed and how long similar products have lasted in the past. Companies know this, they set premium prices based upon it, and they capitalize on the profits that inevitably result. And then they proceed to protect those profits by setting their warranty periods to be far less than the expectations of longevity upon which their prices were originally set. Sounds like a pretty nice setup if profit is your main motivation. But how does all of this fare through the eyes of your customers? And, of course, is it a good strategy?
This is a difficult question to be sure. But here is my take on it – purely from a strategic point of view:
When there is a very obvious design defect that causes a product to fail well before its expected useful life, I believe companies should admit to those issues and strive to correct them in some way – even if it occurs outside of the standard warranty period. That’s not to say they should replace the product entirely. But, at the very least, informing customers of the issue and offering to make some part of it right would serve to build a level of trust and loyalty that, in my opinion, would far outweigh whatever costs a company might need to incur in the process.
Running away from an issue (or, more accurately, hiding behind a relatively limited warranty) might be a smart short-term financial decision for a company. But what about the longer-term financial effect that a decision like that will inevitably have on the value of the brand? Regarding my refrigerator situation, I can tell you that I am very unlikely to buy another appliance from that particular company again; and not only another refrigerator, but any appliance. And if I ever did decide to venture into that territory again, the product would have to be so heavily discounted that I’m sure it would hardly be worth it for that company to have me as a customer.
On the other hand, if the company had simply acknowledged the issue and told me what they had done to make sure it never happens again, I almost certainly would have considered buying from them again. And if they had offered me some small amount of money toward a new appliance, I definitely would have bought from them again. And I can say the exact same thing for the many other products and companies with which I have had similar experiences.
Which brings us to the counter argument of – if there are so many products that are falling short of customer expectations, then, collectively, companies around the world would need to be paying out millions, if not billions, of dollars if they were to follow my advice above. At least on the surface, that doesn’t seem like it would be a workable strategy. Unless, of course, companies started building high-quality products that actually matched their customers’ expectations – which is exactly what would start to happen if companies knew the financial stakes were that high.
And then there’s that nice little side business of extended warranties, which is actually another pretty strong argument for keeping warranty periods on the low side. I mean, if customers are willing to pay extra for something that they probably should have received in the first place, why wouldn’t companies take advantage of that? And it’s honestly pretty hard to argue against that logic – except for the fact that, as a consumer, I absolutely hate extended warranties! I know that’s hardly a scientific position, but I’m sure that I’m far from alone in my feelings on that subject.
All evidence to the contrary, I’m really not trying to take a position as to which strategy is right or wrong. In fact, the only “wrong” strategy is the one that doesn’t meet your goals. So if a company is more concerned with maximizing short-term margins and avoiding having to pay out any extra costs, then, by all means, having a relatively short warranty may be the best way to go. But if a company promotes long-life products and is at all concerned with maintaining the long-term value of its brand, then it’s certainly worth considering backing up that position with a warranty (or some other policy) to match.
What it all really comes down to is aligning your message to your actions. When your customers’ expectations are not being met, it can only be because your message and your actions are not in alignment. And if you happen to be profiting from that misalignment in the short-term, you may want to consider the long-term viability of keeping that particular strategy alive.
Listen to the podcast episode
Dear Strategy: Episode 115
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Bob Caporale is the founder of Strategy Generation Company, the author of Creative Strategy Generation and the host of the Dear Strategy podcast. You can learn more about his work by visiting bobcaporale.com.