Product Protection Plans: What You Need to Know About Extended Warranties and Accidental Damage
The extended warranty market for consumer electronics alone is expected to grow to more than $59.52 billion by 2028.
Yes, that’s nearly $60 billion in one vertical alone.
For big retailers, offering extended warranties boosts profits, drives more sales, and increases customer loyalty. But until recently, product protection was primarily limited to those major retailers. These stodgy, more traditional businesses left out any retailer outside of the top 1%. After all, there was no financial incentive for them to bother to create programs that better suit the needs of new product types or customers.
Not that consumers were particularly satisfied by the plans they were getting from traditional providers. Legacy protection plans suffered from archaic claims processes that could take months to resolve — resulting in even more frustrated customers. In the consumer’s mind, that frustration is tied directly to the store where they bought the product, no matter who really deserves the blame. In this way, poor customer experiences post-purchase hurt your brand down the line.
Today, Extend is committed to redefining the industry with an approach that builds brand affinity instead of hurt it — and that can be made available to retailers of all kinds and sizes.
What is a Product Protection Plan?
Product protection plans, which can be structured as service contracts or extended warranties, are cost-effective ways to protect electronics, auto parts, outdoor and recreational products, jewelry, health & fitness, appliances, furniture, and more.
Millions of product protection plans are sold each year to help consumers keep their products in working condition. The terms and conditions around these plans are highly regulated in many states, depending on the product and types of coverage.
Here’s a modern example: let’s say you drop your phone. Even if you’re unfamiliar with product protection plans, you’ve probably heard of AppleCare. Apple’s manufacturer warranty doesn’t cover accidents, while AppleCare’s protection plan offers accidental damage coverage so you’re not paying out of pocket if you drop your phone and crack your screen.
Types of Protection Plans
Depending on the type of product, protection plans can offer a variety of benefits ranging from technical assistance and discounted repair services to product replacement and maintenance plans. The most common types of protection plan coverages for consumer goods include extension of the manufacturer’s warranty, which may cover things like electronic failures and defects, and accidental damage coverages.
Plans may offer a combination of coverage options and resolutions for the customer. Flexible benefits you may see across plans include provisions for repair and replacement or technical support. Coverages and term lengths vary from plan to plan, so it’s best not to assume you know what is covered or for how long.
Extended warranties extend the manufacturer warranty (aka OEM warranty) coverage after its expiration. In other words, the benefits of an extended warranty don’t begin until the end of the manufacturer warranty coverage.
Coverage can have different terms and conditions than manufacturer’s warranties. Common exclusions include using a product for commercial purposes, “acts of God,” owner abuse, and intentional damage.
Accidental Damage from Handling (ADH) coverage
While the extended warranty segment held the largest protection plan market share in 2019, contributing to around three-fifths of the market, ADH plans are estimated to hold the highest compound annual growth rate (CAGR) of 6.0% from 2020 to 2028.
ADH plans protect specific products from certain types of accidental damage for a specific coverage term length. This is the type of coverage you get from AppleCare when they replace your cracked screen. Coverage typically begins on the date of purchase or date of delivery. Depending on the covered product, accidental damage can range from breakage to cracks, rips, or liquid damage.
What Protection Plans Are Not
There is some additional nuance when it comes to product protection, so let’s also look at what product protection is not:
Product protection plans are not warranties
People frequently conflate warranties and protection plans, but they’re actually very different. An extended warranty is a service contract, not a warranty — which actually refers to a manufacturer’s warranty, or OEM (original equipment manufacturer) warranty.
A manufacturer’s warranty, also known as a limited warranty or an OEM warranty, is a product guarantee that protects the consumer’s products from defects in manufacturing or materials.
Going back to the example of the iPhone, if your battery fails from a defect in manufacturing within a year of purchase, that would be covered by the manufacturer’s warranty — the manufacturer’s promise of product quality.
Manufacturer’s warranties are regulated federally by the Magnuson-Moss Warranty Act, while product protection plans like extended warranties are regulated differently.
Product protection is not insurance
Another point of confusion is the difference between a protection plan and an insurance policy. Product protection plans are not insurance policies.
If you frequently lose your iPhone, you may want to ensure you can get a replacement without paying full price for a new one. For that protection, you buy phone insurance. Because this is protection against financial loss or theft, it is insurance.
OEM warranties, protection plans, and insurance may have some similarities but are all governed and regulated differently. A product protection plan helps keep customers using your products.
How Product Protection Plans Work
A service contract, or service plan, is a legal document between a consumer and the obligor that is filed with regulators in several states and must be approved by regulators before it can be sold to consumers. Let’s look at all the parties to a protection plan:
Customers (Purchaser) optionally purchase product protection at an additional cost.
Customers buy the plan from a seller, typically from a merchant at the point of sale (online or in-store), or some protection plan providers sell directly to consumers.
Protection plans also have administrators, or the entities responsible for executing the plan’s claims handling and service obligations. The administrator and the obligor of a plan may be the same company, or the administrator could just manage the program on behalf of the obligor.
The obligor, or service contract provider, holds the risk and is ultimately responsible for compliance and claims expenses. Obligors hold underwriting responsibilities, and have control over pricing, projections, and the assumptions that go into risk and performance.
The pessimists among you will wonder, ‘What if the obligor fails?’ The final critical party to a protection plan is insurance — providing an added level of security through Contractual Liability Insurance Policies (CLIPs) to ensure all claims will be covered, even if the obligor is unable to meet its commitments.
Unlike some other digitally native product protection vendors, Extend fills almost every role with our proprietary protection programs — we sell, administer, and underwrite all plans for merchant partners and their customers so that customers and merchants are never passed off to third party plan providers. Extend also has the ability to act as its own obligor, which provides greater flexibility to create unique, customer-centric product protection programs.
Claims service and fulfillment
Product repair benefits cover the repair of a product via depot, onsite, or through an authorized service center. These protection plans are for items whose value is greater than the cost of labor. It makes more sense to repair a Peloton bike, for instance, than to replace it.
Product replacement benefits mean that, when a consumer’s claim is approved, they’ll be able to get a new product. These service contracts work well with everyday items that are relatively low in price. Think Skullcandy earbuds — it’s easier and more cost effective to replace a damaged earbud than to repair it.
Why Offer Product Protection
When a customer buys a product, there’s a number of things that can go wrong. For instance, maybe it gets a lot of love for several years, and then someone drops it and cracks it. Different product challenges call for different responses, but how you solve these kinds of pain points is ultimately how you drive customer loyalty and retention.
But not all product protection programs are created equal. To ensure excellence at every phase, merchants need a modern offering with a full-stack platform, powered by AI technology and underwriting capabilities.
That’s where Extend stands out. We’re the only platform that handles everything about your product protection program from offer merchandising and optimization to claims adjudication, all with a commitment to an amazing end-to-end customer experience.
To get you up and running faster, we dedicate subject matter experts to help you launch in just weeks — all so that you can focus on what matters: selling great products.
Build consumer trust
Product protection plans offer peace of mind. We consistently see 10-20% attach rates for products across verticals because customers want that extra protection.
Drive pure profit at no cost
Extend comes at no cost, so the revenue merchants make are pure profit and go directly toward their bottom line. And because Extend sends customers back to the original merchant for replacement products, it also often leads to higher spending. Some people call this the “gift card” effect. If you go into a store with a $50 gift card, you’re likely to spend a higher amount in total — leading to new incremental revenue.
Create long-term advocates
Extend keeps customers in merchants’ ecosystems. When an issue arises, customers come back to the merchant — they don’t switch to a competitor. In fact, we see a 4.5% repeat purchase rate for customers who purchase product protection. This multi-touch engagement strategy adds another meaningful touchpoint to the customer journey.
Offer Product Protection to Your Customers
Today, merchants of all sizes with warrantable SKUs have the power and the opportunity to pick the coverage that fits with their products and their customers.
Extend now owns and manages all aspects of the customer experience from offer, to sale, to claims, and finally to claim fulfillment. This is critical in order for Extend to be able to control our own destiny and to avoid the sub-optimal experience that legacy providers have been giving consumers for years and that even some new entrants provide.
Ready to learn what product protection can do for your business? Reach out for a demo now.
Frequently Asked Questions
What is an obligor?
An obligor is a service contract provider. When it comes to the parties to a protection plan, the obligor holds the risk and is ultimately responsible for compliance and claims expenses. They have underwriting responsibilities and have control over pricing, projects, and assumptions that go into risk and performance.
Is Extend an obligor?
Yes, Extend is authorized to act as an obligor, which means it has more control over the types of programs it can create and can tailor programs more closely to what merchants need.
What is an extended warranty?
An extended warranty usually refers to an extension of coverage from the manufacturer’s warranty. The extended warranty becomes active at the end of the manufacturer’s coverage.
What is accidental damage from handling?
Accidental damage from handling refers to a type of product protection plan that covers accidents and breakage that the manufacturer’s warranty or an extended warranty might not cover. Accidental damage can cover things like breakage, cracks, rips, or liquid damage.
What different ways are protection plans serviced?
Protection plans are usually either repair plans or replace plans. Some items are large and expensive enough to warrant a full-scale repair program before turning to replacements. Other items are just easier to replace if they stop working.
Is product protection insurance?
Extend product protection is not insurance because it does not protect against financial loss or theft. Product protection is a service contract.
Is product protection a warranty?
Extend product protection is not a warranty. Warranty refers to the OEM (original equipment manufacturer) warranty that comes with a product. Extended warranties (not a warranty) may extend the same coverage terms of the warranty but for a longer term, and accidental damage from handling coverage can augment a manufacturer’s warranty.
What is an OEM warranty?
OEM stands for original equipment manufacturer, so an OEM warranty is another term for a manufacturer’s warranty.