What are product warranties?

A product warranty is a type of guarantee that a manufacturer or merchant makes regarding the current and future condition of its product. Within a service contract provided to the customer, the terms and warranty period are delineated precisely as to define which repairs or exchanges will be made in the event that the product does not function as originally described or intended. Warranties often include consumer protection against product defects and accelerated wear and tear. Consumer products are not required by law to have warranties, but if one is given, it must comply with the Magnuson-Moss Warranty Act and be clear, fair, and enforceable.

Warranties fall into two separate categories: limited warranties and extended warranties.

A limited warranty, also known as a manufacturer’s warranty, is a guarantee from the manufacturer of the product that the product will work as intended. There is no additional cost to the consumer. Federal law in the United States requires that limited warranties be available for you to read before you buy a product. Coverage terms for limited warranties vary, but it’s typical to see a one-year limited warranty.

An extended warranty is an optional extension of the term length of the limited warranty. Extended warranties may be purchased by the consumer for an additional cost, and they are offered and backed by a third party. Extended warranties cover everything included in the manufacturer’s warranty plus additional services such as protection against power surges and wear and tear.

 

The difference between warranties and product protection

In the most basic sense, warranties are assumptions of trust that customers make in a product. Warranties work by repaying that trust with a service contract. The service contract is a binding agreement that guarantees replacement or services within the limits of the contract’s terms.

So yes, merchants can offer warranties too. In order to remove some confusion, this article will refer to merchant-offered warranties as product protection.

Product protection has been around for years. However, access has traditionally been limited to all but the largest of retailers because of the investment it takes to get started and the potential insurance risk created by smaller product pools.

The beginnings of InsurTech has been a catalyst to the insurance industry. Digital solutions have allowed insurance companies to become more progressive in how they do business and who they do business with. In turn, product protection plans have become a reliable advantage for all retailers - startup and enterprise alike.

The first step to understanding warranties is to move past the jargon. Product insurance, warranty, guarantee, extended warranty, product protection and service contract all refer to similar, if not identical opportunities. In the end, there are just two basic categories of warranties; a manufacturer’s warranty and product protection.

Manufacturer’s warranty

A manufacturer’s warranty is a legal contract that binds the manufacturer to providing repair or replace services. Manufacturers typically have two great reasons to offer warranties:

Limit liability

Contractually capping potential losses allows manufacturers to accurately estimate the financial impact of a warranty program. 

Instill product confidence

Warranties have the ability to provide customers with peace of mind from the moment they purchase a product. By virtue of the guarantee, the warranty is assuring the consumer that they’re making a smart financial decision because they can rely on said product for an extended period of time. This empowers the consumer, while increasing the trustworthiness of your brand. 

There are two types of manufacturer’s warranty:

Full warranties

These meet the minimum standards specified for comprehensive warranties as set by federal law. Full warranties will require the manufacturer to either repair or replace the item if something unfortunate happens.

Limited warranties

These do not meet the minimum requirements of a federal comprehensive warranty. This limitation means that these warranties will specify the circumstances under which the manufacturer will repair or replace an item. Most instances are limited to a certain type or malfunction or will exclude damages that are withstood during particular activities. For instance, water damage on a cell phone may not be covered under a limited warranty.

Product Protection

Product Protection is a distinction made between a manufacturer’s warranty, and a service contract purchased at the point of sale in the form of a product protection plan. These plans are backed by the retailer’s insurance partner. As an umbrella term, product protection plans can include various types of service contracts.

The intent of product protection is similar to those of manufacturer's warranties. Product Protection Plans aim to improve:

Brand Trust

Consumers gravitate towards brands that sell high quality products, while providing reliability. Additional coverage in the form of a product protection plan indicates to a consumer that a company is dedicated to providing a high quality experience throughout the life of the product. Brand loyalty is born out of those experiences. 

Customer Experience

If there is an issue with a product, a product protection plan is an opportunity for a company to engage with a consumer in a meaningful way. Companies that use that opportunity to delight their customers, are well-positioned for the sale with that consumer.  

Sales Revenue and Margin opportunity

Retaining customers is cheaper than acquiring new ones, and product protection plans have the potential to increase the likelihood of a consumer making future purchases with your company. Additionally, these plans are a financial moneymaker when properly executed. Between the companies and their insurance partner, it can be accurately estimated the margin that can be expected on the sale of each plan. 

One difference between guarantees provided by a manufacturer and those made by a retailer is liability. By offering limited warranties, manufacturers are able to limit their liability against particular types of failure. Outside of merchantability - laws that require new products to be in working condition when received - retailers don’t have the same liability burden. When retailers provide product protection, they are going above and beyond the parameters set in the manufacturer’s warranty.

Why product warranties are important

For Merchants

In the eyes of consumers, warranties have become synonymous with high quality products. It’s akin to a merchant standing by their product from day one, while also providing a consumer with guaranteed peace of mind. Consumers have also begun to expect guarantees when purchasing items. If they feel secure that they’ll be satisfied with their purchase, they’re more likely to make that purchase in the first place. 

For Consumers

Any purchase, large or small, comes with a bit of trepidation about the period of time one can enjoy the item. Product warranties provide consumers with peace of mind and a feeling of security. 

Why product protection is important

For Merchants

Merchants achieve two critical objectives with product protection plans. The first is passive revenue generation. Crafting carefully worded contracts and working with insurers is a sure-fire way to generate additional revenue over time. The second objective is that these plans strengthen relationships with consumers. A protection plan covers more than a basic product warranty and can leave a consumer feeling supported and confident in their purchase. It also can be offered at purchase or post purchase, which facilitates further interaction between a consumer and a brand. And finally, whether it be a one, two or three year warranty, set time-horizons create natural opportunities to reconnect with a consumer over time. 

For Consumers

Protection plans have evolved in two meaningful ways in recent years on the consumer side. The first is that consumers have better tools to access and fully understand their plans. This makes them more likely to unlock the full value of said plan. And secondly, plans are not cost prohibitive. In many ways, these plans help provide the final push needed to commit to a purchase by locking in long term value in the mind of the consumer. 

Types of product warranties Warranties versus product protection

Full warranties

A full warranty promises the consumer that the manufacturer or seller will repair the item for free during the warranty period. If the company can't fix the problem in a reasonable number of attempts and in a reasonable amount of time, it has to give the consumer a refund or replace the item. 

Limited warranties

A limited warranty, also known as a manufacturer’s warranty, is a guarantee from the manufacturer of the product that the product will work as intended. There is no additional cost to the consumer. Federal law in the United States requires that limited warranties be available for you to read before you buy a product. Coverage terms for limited warranties vary, but it’s typical to see a one year limited warranty.

Express warranties

An express warranty is an agreement by a seller to provide repairs or a replacement for a faulty product or component within a specified time period from date of purchase. 

Implied warranties

An implied warranty refers to assurances, both written or verbal, that a product is fit for the purpose intended and conforms to an ordinary buyer’s expectations. This is the standard set in place unless the sale is identified with the phrase "as is" or "with all faults.”

Types of product protection 

Repair or Replace

Replace contracts work well with everyday items that may be relatively low in price. Most cell phone warranties will replace a damaged cell phone instead of trying to repair the damage.

Meanwhile, repair contracts are better fit to those items whose worth, either intrinsically or in dollars and cents, is greater than the cost of labor. For example, a Steinway piano may be one item worth repairing.

Plan Duration 

A common reason for purchasing product protection is to extend the benefits of a warranty beyond the manufacturer’s warranty period. This is why protection plans are commonly referred to as extended warranties. With a partner like Clyde, customers have the option to choose the protection plan duration. At Clyde, duration options can range from one, two, three or five years of service for higher ticket products.

Simple Product Protection 

Product Protection in its simplest form requires some explaining. These plans do not cover that magical time between product purchase and receipt. Life happens, items break. Simple product protection works well if the item being insured is covered by a manufacturer warranty, because the manufacturer will cover merchantability. So the manufacturer is responsible for ensuring that new items perform as new items should when delivered. In this case, adding a protection plan will extend the coverage duration and may even expand coverage options, giving the customer greater peace of mind. 

ADH Product Protection 

Accidental Damage from Handling (ADH) Product Protection plans also extend the duration of coverage beyond the manufacturer’s warranty. Unlike simple protection plans, ADH plans begin at the time of purchase. The added benefit is in the name, any accidents from damage or handling are covered if the plan was purchased before that damage happened. Matching the coverage start date with the time of plan purchase means that merchantability is insured, which further reduces the retailer’s liability.

Who can offer product warranties and product protection? 

Here are just some of the merchants currently utilizing Clyde to facilitate product protection plans:

  • Consumer electronics
  • Furniture
  • Commercial furniture
  • Jewelry
  • Appliances
  • Commercial appliances
  • Bicycles
  • Mobile Phones
  • Tablets
  • Computers
  • Televisions
  • Sports Equipment
  • Outdoor Equipment
  • Auto Parts
  • Audio Equipment
  • Musical Instruments
  • Drones  

Are product warranties transferable? 

Yes, product warranties can be transferable between individuals. 

Is product protection transferable? 

Yes, there are protection plans that are transferable between individuals. 

Why product warranties and product protection are important marketing tools 

The cost of customer acquisition continues to increase year-over-year, and traditional measures like advertising, email marketing and social media marketing are rising in cost and dropping in effectiveness. One of the hidden benefits of a product warranty or protection plan is that it serves as a communication tool with your current customers. As plans are set to expire, merchants can use warranty information as a way to re-engage with their customers. As a result, merchants with comprehensive and technology-enable warranty programs report lower CAC costs than those that do not. 

Product warranty management software 

Clyde leverages multiple partnerships to bring a robust catalog of coverage options, facilitating extended warranty at the date of purchase, warranty extension plans, accidental damage coverage at the date of purchase, and limited warranty and limited warranty extension programs. Our platform was designed to provide a simple and transparent insurance experience for your business, your team, and your end-customers.

What to expect 

More than ever consumers are looking for markers of trust, in both brands and in the products they sell. Two-thirds of US consumers are looking for greater transparency from merchants. There is a clear gap between what the industry is providing and what customers are yearning for. According to a Statista report, 88% of retail shoppers will abandon their carts, a figure that has climbed by nearly 15% in just the last two years. Offering product protection that clearly sets customer expectations is one way to inform and nurture them past that final barrier to purchase.

Customers are able to choose what they pay based on the duration of coverage they want covered. For example, one year of protection will be cheaper than three years of the same protection. As an added bonus, coverage offers the potential of added revenue if and when the product is damaged and needs service. These “nice to have” features are quickly transforming into widespread consumer expectations and many times prove to be the differentiator between a sale and a lost customer.