Sell the guarantee as a paid warranty

1. Where the play comes from

When one large phone maker launched its first smartphone, it replaced any damaged phone with no questions asked. People took advantage of it, but the cost had been priced into the product, and it protected the brand. Years later, the same company was reported to be taking in billions a year from a paid protection plan. It had once given that away.

The question that followed was whether the same could be done elsewhere. One company that sells high-end physical products included a ten-year warranty as standard. Asked whether the warranty could be sold for 10 percent of the product's price, the founder saw no reason why not. It was tried, a large share of customers opted in, and a new source of profit started. Nothing about the warranty changed except that it was now sold.

2. How it works

Sell your product. Then, once the customer has agreed to buy, offer a guarantee for 5 to 30 percent of the product's price.

Where margins are high, a guarantee priced at your cost of goods means you never lose money on it. If the cost of goods is 10 percent of your price, you could charge 10 percent for the guarantee and never lose a dollar. The test is that what the guarantee brings in should be more than what it costs to fix the product.

The other advantage of doing it this way is that you need not refund anyone. You keep the revenue and pay to deliver again, usually only a small part of the price you charged.

3. The arithmetic

Take a $1,000 product, a $100 guarantee or warranty, and $100 to replace the product.

If 1 in 20 buyers claims on the warranty, you have taken in 20 warranties at $100 and paid $100 to fix one: $1,900 of guarantee profit.

The advanced note: the profit on the one sale you had to honor falls from $900 to $800, because the $100 cost was paid twice as part of the guarantee. That is described as not bad at all.

What you are doing is buying and selling risk, so it comes down to knowing your numbers. In the physical-products company, almost nobody ever got in touch about the warranty, so the extra 10 percent was profit with no new operations or process: one line added to the sales script.

4. It works at any price

Given how many people pay for shipping insurance, a newly invented add-on for physical products, it appears the idea works at every price. Whether you sell expensive things or cheap ones, consider trying it. People dislike risk and will pay you to carry it for them, and as long as you price it right, it is very profitable.

5. It can cover your commissions

When it was rolled out, the hope was to recover as much of the sales commissions as possible. A large share of customers took it, and it covered almost half of the sales team's commissions. The arithmetic: if half your customers take an add-on priced at 10 percent of the sale, you get 5 percent of revenue back. Where reps are paid 10 percent, that is half their pay, from one line and no added operational load.

6. Worked products

Product	Price	What is guaranteed	Guarantee price	Take rate	Refund rate	Added lifetime value	Added revenue
Wooden table	$1,000	No water marks, or a replacement	$100	45%	5%	$43	4.3%
Personal training	$3,000	Lose the weight or get the money back	$2,000	35%	10%	$630	21.0%
Dry cleaning	$200	No tears or stains on return, or the money back	$20	25%	5%	$5	2.4%

In the personal-training row, the $2,000 guarantee is about 67 percent of the $3,000 price, outside the 5 to 30 percent range in section 2.

A reminder travels with the table: even a 4 percent rise in revenue can sometimes mean a rise of 20 percent or more in profit.

These started from nothing more than selling an existing warranty; the examples are meant to show how far the idea can be pushed.

7. The checkout question

Ask after they have bought, and ask as if it were routine: would they like the standard warranty on that? They will ask what it is. Explain that it is for anyone who wants a little more peace of mind: if anything happens to the item, or if the result does not come as planned, they are covered, and a lot of people take it. Then ring it up as one more line on the order.

When someone asks for an exchange or tries to use a guarantee, check whether they bought it.

This also lets you be the generous one. A customer who did not buy the warranty can still get their money back from you. You probably already do that for free, so you might as well earn something from it.

8. Where it fits best

The one-line add-on at checkout works especially well for main-street and traditional businesses. It costs nothing to deliver beyond some arithmetic up front. A warranty or insurance can also be sold as a small recurring charge after a main purchase; that version, continuity that starts automatically, is carried on SOP 77, the umbrella page for the ten pricing plays.

Flag: the range. Where all ten pricing plays are listed together, this one gets a lift of 5 to 20 percent. The guarantee is priced at 5 to 30 percent of the product in section 2, and the worked products add 2.4 to 21.0 percent to revenue. The list does not settle the range. A second reading prices a paid guarantee at 5 to 50 percent of the product. This page does not settle which reading is right.

9. What this page does not decide for you

• The price of the guarantee. 5 to 30 percent is the range in section 2, with a wider reading flagged in section 8, and pricing at your cost of goods is one way to set it; this page gives no figure for your product.
• Your claim rate. One claim in twenty is the worked case. This page gives no figure for yours; measure it before you price.
• What to promise. Replacement and money back both appear in the worked products; neither is ranked.

10. The checklist

Question	The answer
When to offer it	After the customer has agreed to buy
Price	5 to 30 percent of the product's price (other readings in section 8); with high margins, at your cost of goods to never lose money
The test	Guarantee revenue above the cost of fixing the product
On a claim	Deliver again rather than refund
Worked case	$1,000 product, $100 warranty, $100 to replace, 1 claim in 20: $1,900
Any price point?	It appears so; price it right
Commissions	Half taking a 10 percent add-on returns 5 percent of revenue
The question	Would they like the standard warranty; explain it as peace of mind
Non-buyers	You can still refund them

11. What this page does not cover

Choosing a guarantee and setting its conditions is SOP 7 — Choose and condition a guarantee, and stacking, naming and pricing a performance guarantee is SOP 8 — Stack, name and price a guarantee. The other pricing plays are SOP 77, the umbrella page for all ten, and an add-on offered at the moment of purchase is SOP 66 — Run the classic upsell and choose the moment.

Warranty, service-contract and insurance rules are not covered on this page.