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Wednesday, 01 May 2013

The Top Two Challenges Retailers Have with Extended Service Plans—and How to Master Them

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As the prices of electronics and appliances continue to fall, it’s critical that you train your team on how to effectively position your extended service plan with the benefits that will provide the best value for the price to your customer.

Extended service plans (ESPs) and accessories are helping many retailers make up the loss of margin they’re experiencing as a result of lower prices on everything from computers to washing machines. While it’s true ESPs provide the much needed margin, more importantly, they provide additional value by helping to improve customer loyalty and reducing product returns.

Most companies face two challenges that prevent them from maximizing ESP sales. One, they don’t know how to balance the benefits of the plan with the price. And two, they don’t know how to train and manage their organization to sell them. Here are a few ways to address both of these challenges.

Challenge No. 1: Balance Benefits and Pricing

Start by analyzing two things:

1. Compare the price of the plan to the price of each SKU within the category. Next, fill in the ESP closing rate for each SKU.

2. Now compare the ESP benefits and coverage offered on each SKU. Most of this will be the same within each category.

What should become readily apparent is where the customer thinks it’s a great value and where they don’t. The decision now is whether to adjust your pricing by either offering tiered pricing or changing the coverage to make the plan a better value to the customer. Basically, you’ll evaluate how much coverage you want to offer and how much margin you want to make.

While you need to protect your own interests, you should also consider the customer’s propensity to buy. Having high margins is great, but with no sales it’s senseless. The average customer will weigh the cost of the ESP in relation to the price of the product. As a general rule, we’ve found that customers will not spend more than 15 to 25 percent of the retail price of the product on a service plan. So how do you get them to buy an ESP that hasn’t come down in price even though the product has?

Again, start by reviewing your coverage and create more value. To do this, you’ll need to evaluate which benefits are most important to the customer. Work closely with your insurance company to create a plan that covers what the customer cares about most but still allows your program to be profitable.

Challenge No. 2: Train and Manage Your Organization to Sell

Most of the sales teams we observe offer their ESP with a quality presentation about 10 percent of the time. They are inconsistent with their presentations for a few reasons: They don’t understand the ESP, they don’t believe in it, or they wait too long in the sales process to offer it. However, lack of quality presentations isn’t the main cause of poor service plan sales.

We’ve found that the biggest cause for poor sales is that sales associates at most retailers don’t offer the ESP 100 percent of the time. In fact the average offer rate is actually around 40 to 45 percent. Here’s the philosophy we live by and teach: If you don’t offer it, the customer isn’t going to buy it. I know…brilliant, right?

Think of the last time someone offered you an ESP. Did they hesitate or mention it in an unconvincing manner? This is pretty common. Sales teams who don’t know enough about their ESPs don’t believe in them, and it’s reflected in their presentations. They may offer it, but their hearts aren’t really in it. It’s vital to ensure your staff fully understands why the ESP is important to the customer. Ask each one of your people to tell you the two best benefits covered by the plan that really make it worth buying. See what they say. Each person should give you something a little different. From their answers, you will be able to determine each person’s level of knowledge, belief and confidence in offering the plan.

In addition, offering the ESP during multiple points of the sales process rather than waiting until the end greatly increases the chances of selling it. An ESP should always be part of the sales interaction, not an afterthought. This becomes a retail sales training issue.

If you run a retail outlet without a sales team on the floor, forcing you to offer ESPs only at the checkouts, train your associates to sell by educating them on the benefits of each plan and how they can appeal to the customer’s need for security and service after the sale.

One last thought to ask all of your salespeople and cashiers: If you don’t offer the ESP to the customer, who just made the decision not to buy? You did! Is that right? No! You are not there to decide for the customers; you’re there to give them their options. Inform the customers, and let them make the decision.

More tips on selling and pricing extended service plans.

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John Quattrucci

John Quattrucci is President of Stuart & Associates, a retail consulting firm specializing in Sales and Margin Growth Programs and Returns Reduction Programs.

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