6 Questions to Ask Before Creating a Warranty
As a business owner looking for ways to stoke interest in your product or service, you might have overlooked an inexpensive yet effective differentiating tool: a warranty.
Many business owners might consider a warranty or a guarantee, two terms that are used interchangeably, as more of a matter left to their legal team. And to be sure, since a warranty is essentially a contractual agreement that the good or service you are selling will be of a particular quality and without defect, it behooves you to get some legal advice about it, says Enrico Shaefer, the founding attorney of Traverse Legal in Traverse City, Michigan.
The truth is that when you do sell something, you are actually already offering something called an "implied" warranty, which really means that there is some expectation about the quality of the product or service your customer is going to receive, Shaefer says, something that is detailed in Article Two of the Uniform Commercial Code, a set of laws enforceable in most states. For instance, when you buy an ink pen, you can expect that it will work when you try to write with it or, with a car, that it will start and drive when you turn the key.
But warranties and guarantees also should be looked at from a different perspective where it can become a competitive advantage. That's where the notion of offering an "express" or "explicit" warranty – where you specify exactly what you are guaranteeing your customer – comes in. An example of this is when an automobile manufacturer offers a 10-year or 100,000 mile guarantee. While there are certain standards for big consumer purchases like cars and appliances, you can sometimes use a variation – like a lifetime guarantee – as a way to set you apart from your competition. "A warranty can be incredibly valuable as a marketing tool," says Shaefer. "What you're really trying to do is lower the perceived risk that your customer feels in buying your product or service."
Sargam Patel, who heads up Los Angeles-based Agent18, which has been manufacturing and selling cases for iPods and iPhones since 2004, says that offering a warranty represents a critical point in a company's relationship with the customer. "It's the time when a person has purchased your product," he says. "That means you can look at it as a way to reinforce their decision to buy from you, or, if done poorly, you can lose a customer. The last thing you ever want to do is get in an argument with a customer."
1. Why offer a warranty?
Dr. James Talaga, a professor of marketing at La Salle University in Philadelphia, says there are several reasons why companies might want to offer such warranties:
1. A company may have a poor reputation and the explicit warranty may be used to give assurances to the customer about product quality (thereby reducing the perceived risk in buying it).
2. Competitors may offer similar explicit warranties and in order to be competitive, you may need to do so too (if all else is the same, and your competitors offer a better warranty, they have a competitive advantage).
3. If it is normal practice in the business to offer such warranties (e.g., the automobile industry), then you too need to offer such a warranty.
4. When offering a new product (particularly innovations) you may want to offer an explicit warranty also to reduce the perceived risk for the customer.
5. You may want to offer an explicit warranty to reduce your own risk exposure. If the product can be misused, requires maintenance and can be under-maintained or has shelf-life considerations, offering an explicit warranty can limit, to some, extent, your liability should the product fail.
6. If the product will be used in varied use conditions (e.g., extremes of climate), you may want to have an explicit warranty to protect yourself.
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2. What should be covered in a warranty?
If you decide that offering a warranty makes sense for you and your company, what should you think about covering? Shafer says that he counsels his clients to, "think like a customer and focus on the essential elements he or she might be looking for when it comes to buying your product or service." Again, the key is to think of ways that make your product or service sound less risky to the potential customer – such as the ability to get their money back, receive free repairs or even the ability to exchange an item for a free replacement.
Patel of Agent18 says that his warranty covers any manufacturer defects for two years. He also has added a half-price replacement program where customers can upgrade to a new case for half the price. "It's like an insurance policy for the customer where if the product does its job, we want you to come back," he says.
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3. What should NOT be covered?
It's just as important to specify what is not covered by your warranty, says Talaga. "If the product has parts that wear out and it is your intent to sell replacements to customers, as in, says, ink for laser printers, then you would limit the warranty," he says. "If you intend to sell the product with minimal markup in order to make money from service, then clearly service would not be covered in warranties."
Patel says that he has to spell out in his warranty that his product is not guaranteed for every problem, such as when someone drops their phone or engages in some form of negligent behavior. While the case is designed to protect the phone, he knows he can't control every situation where someone might drop it. While he is willing to replace the case for half-price, he wants to make it clear to his customers that he cannot guarantee the safety of the device within it. "It would be irresponsible to make a claim that you will protect someone's phone no matter what," he says. "Because you give yourself the liability of replacing not only the phone, but also the data on it. How can you put a price on someone's wedding photos?"
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4. How long should it last?
In determining how long your warranty should last, you should get some sense of the normal operating life of the product as the guide to setting the warranty life, says Talaga. "In some cases, firms offer lifetime warranties such as Land's End lifetime warranty on their clothing," he says. "Such a warranty would of course require that the company have a high level of confidence in their product quality."
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5. What happens if you sell another company's products: can you offer your own warranty on top of theirs?
Offering extended warranties on top of existing ones issues by a manufacturer can be another great way to differentiate yourself from the competition, especially in a sector like retail, says Talaga.
Mike Faith, the CEO of Headsets.com, says that he offers extended warranties to his customers on the headsets he resells from manufacturers. "Why not?" he asks. "Stand out. Manufacturers aren't marketers, they run scared while marketers set the pace." Faith says that he also will make good on any warranty claim, regardless of the timeline of when it is submitted. "Your warranty is a minimum obligation, not a policy with which to alienate your customers," he says.
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6. Are warranties just for products or can you offer them for services as well?
Don't forget that even if you sell a service, you can still offer a warranty. Consider examples where hotel chains commonly offer satisfaction guaranteed offers; car mechanics may guarantee their work for 90 days or longer; or a company like H&R Block may offer a form of warranty in that they will support you should they make a mistake in your taxes.
The difficulty in offering warranties for services is that by their very nature, services involve a greater or lesser degree of custom production, says Talaga. "This lack of mass production means that there's a large number of variables that can influence a customers use of products and hence their level of satisfaction," he says.
Case in point: Dale Furtwengler, a consultant in High Ridge, Missouri, says that's he's often asked by his clients, "Do you guarantee the results?" "My answer is, 'No,'" he says, "Because I can't guarantee that a client is going to implement the solutions I suggest. I guarantee that I'll do everything I agreed to in the agreement and that it will work if you employ my advice, but I can't guarantee that you're going to take the necessary action to get the result."
Shaefer at Traverse Legal, on the other hand, says that he offers all his clients a money-back guarantee for any work he does as a way to win the confidence of his customers. At the same time, he's not worried about droves of them taking him up on the offer as his goal is to win repeat customers by offering the best possible service. If a client isn't a good fit, he's happy to give them their money back. "The truth is that most customers never take follow up on warranties," he says. "And in our case, we've had one person ask for a refund in six years and we were happy to give it to him. We just didn't have good chemistry."
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Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.