The No. 1 Pathway to Higher Profits
In order to build a successful business, you need to have a really good understanding of your customers, and what they want. In the repair business, we know our customers want their vehicle fixed right, they want it done as quickly as possible, and they want the best price.
But, while I was operating my shops, I discovered that what my customers wanted more than anything else was the peace of mind in knowing they wouldn’t have to pay for the same repair again. That caused me to ask myself: Beyond performing the repairs to the highest standards, was there anything else I could provide that would give them with the peace of mind for which they were looking? I’m pleased to report I found the answer, and that it soared our profits, but before I share it with you, I ask that you take a moment to consider something first.
The insurance industry is one of the most successful industries of all time, and we pay them for one thing and one thing only: peace of mind. With the understanding they are in the “risk” business, insurance companies carefully evaluate their risk with every customer, which is why they consider our age, our current state of health, the type of work we do and our lifestyles. On one end of their scale, they find people who are young and in really good health, while on the other end, they have the older smokers who have high-risk lifestyles. Everyone else falls between those two extremes, so the insurance companies use actuarial tables to calculate the level of risk with each potential customer, and they price their policies accordingly.
Knowing that it’s nothing more than a betting game, and that we, as shop owners, know the failure rates of our repairs just as well, if not better, than the insurance companies know the mortality rates of their customers, I decided to implement those same concepts to my businesses. The results? Not only did it have an incredible impact on my bottom line, but it also helped me realize that I was in the “peace-of-mind business,” as well as in the repair businesses.
I had our advisors tell a customer that we had some great news, because there were actually two ways that we could solve their problem. For example, if their alternator failed, we could replace the failed part with a high-quality alternator that carried a full one-year warranty, or we could provide another high-quality alternator that carried a five-year warranty on both the part and the labor. The price difference between the two alternators in an example like this was roughly $40.
As you can imagine, in most cases, the customers asked how long we expected the alternator with the one-year warranty to last, and we simply told them the absolute truth: Both are really good alternators, and both will more than likely last for years, but “if” they planned on keeping the car for a few years, and if they wanted the peace of mind knowing that if their alternator failed within the next five years it wouldn’t cost them a dime, they may want to go with the one that carried the longer warranty. Since the price difference between the two services was typically no more than 10-15 percent of the total ticket, we found that the overwhelming majority of our customers chose the service with the longer warranty.
By offering such services, and assuming very little risk, not only will you provide your customers with the opportunity to buy the peace of mind that so many of them desperately want, but those added dollars will also go straight to your bottom line.
During the first year, you would cover the failure with either of the alternators, so the question is, what’s your risk after that first year? In our case, the failure rate was less than 1 percent, and that was because we were very selective in which parts and services we offered extended warranties for, and we priced the services predicated on the associated risk. I’m also pleased to report the few failures we did see had little impact when you consider the incredible amount of money that we brought in every year by offering these services. We also discovered that by providing optional services with the longer warranties, we better ensured that our customers stayed with us, and, if a part did fail during that extended period, they were absolutely thrilled that there was no charge for the repair. If you’re still concerned about the risk, bear in mind that we found most of our customers sold their cars within 3-4 years, and, at that point, our liability simply disappeared.
If you decide to “test drive” this really great way of helping your customers buy what they want, bear in mind that if you offer two different warranties on the same part, many states may interpret that as selling insurance, which you’re not able to do if you’re not licensed. Accordingly, I recommend that you always offer two different parts. They can both be of the same high quality, and can both come with the same warranty from the manufacturer. Remember, it’s you who’s taking the risk by offering the longer warranty on the part, not the manufacturer.
According to the Wall Street Journal, a staggeringly high percentage of the net profits generated by Best Buy comes not from the items that people like you and I buy at their stores, but from the extended coverage we are offered while standing in the checkout line. It’s a powerful profit-building tool for Best Buy, it helped me turn my shops into nationally recognized businesses, and it enabled me to help thousands of our customers buy what they really wanted: not parts, not labor, but the peace of mind in knowing that for just a few additional dollars, they wouldn’t have to worry about paying for the same repair again.