The warranty safety blanket
There can be little doubt that longer manufacturer warranties do influence the purchase decision for many automotive customers. Choosing a vehicle with a warranty of longer than 3 years gives the customer that ‘cloak of comfort’ that the car will be reliable over the ownership period, otherwise why would they be offering it? However my question is, do longer warranties actually engender greater customer loyalty? In the long run, do they impact retention?
From conversations in the automotive world I know that loyalty and retention are hot topics within the industry. In particular are consumers actually loyal to an automotive brand or do they simply appear ‘loyal’ due to the finance deals they are in? Does this count as true loyalty or is it just convenience?
Today’s consumer has become more comfortable in switching brands
Recent research we (and others) have undertaken suggests the modern consumer is even more ready, willing and able to switch than ever before. You only have to look at the stats for utilities, mobiles phones, and insurance to see how consumer attitudes and behaviour has changed in the last 10 to 15 years. Go further back in time and consumers were far more likely to have a ‘brand for life’ attitude. In reality the choices then were more limited, changing supplier was more difficult and it required a lot more effort to switch. Now you can do it at the touch of a button.
As a result the number of ‘loyal’ customers has diminished. Conversely it also means brands have a far larger pool of potential new customers. In response marketers have targeted the acquisition of new customers, sometimes at the expense of existing ones. Automotive is different to other industries, but balancing customer retention and acquisition remains a major challenge.
Warranty, reliability and customer experience
As vehicles have become more reliable, manufacturers have become more confident in offering longer warranties. Where 3 years (or 60,000 miles) has become a common standard, we now see manufacturers like Kia offering 7 year warranties (100,000 miles). Tesla have gone one better with 8 years on the battery and motors. Without doubt warranties are an important ‘rational’ purchase factor. Perceived reliability, and the offer of a warranty in case things do go wrong, is attractive. However, as all vehicles have become more reliable over the years, has a key point of differentiation diminished? And do longer warranties help brand loyalty?
We recently undertook research into purchase decision-making in the automotive market. We found a strong correlation between warranty, reliability satisfaction, and ‘loyalty’ to the brand. The reliability of vehicles, and dissatisfaction with the warranty experience when faults do occur, drove almost half (48%) of car owners to switch brands on their next purchase. So even with longer warranties consumers are switching brands when things don’t go right.
Today’s consumer has become more savvy about the options and deals available. Their expectation of the brand has increased, and they’re far more demanding of customer experience. Managing dissatisfaction ‘triggers’ has become more critical, so manufacturers and dealers are having to work much harder to retain customers.
Are longer warranties good for customer loyalty?
As already discussed, longer warranties give peace of mind and implies the vehicle is more reliable. From a rational purchase perspective this can be great for acquisition. Longer ownership arguably also gives dealers the opportunity to build a really strong relationship with the customer. An attentive and responsive service team will help customers to feel more valued, and knowing when the warranty expires should also put the dealer on the front foot when marketing potential replacement vehicles.
However, the challenge for dealers and manufactures lies in managing that customer relationship over 5, 6 or 7 years, as the vehicle ages. It’s critical to deliver a consistent and exceptional customer experience, which can be more of a challenge as the vehicle gets older and less reliable. When faults do occur, and the customer experience is poor, 48% of owners will switch on their next purchase.
The length of the warranty offered poses a conundrum. A long warranty may help with acquisition, but it also encourages the customer to own the vehicle for longer. As Experian’s 2014 study shows, having the car for longer (with diminishing reliability) can lead to the customer being less loyal. Long warranties don’t by themselves prevent customers from switching brands. What matters is how they are treated when things do go wrong.
And there are other factors that also come into play. Do dealers treat customers of a recently purchased vehicle differently to someone with a 4 or 5 year old model? Does longer ownership actually make customers feel attached to the brand? Is their finance deal the key to keeping them ‘loyal’? Does older technology in their car make them look more at new features and advancements around them? And, after so many years without changing model, do they just feel it’s ‘time for a change’? Does upgrading their model earlier keep them happier?
What does this mean for customer loyalty?
Customer loyalty is without doubt a complex issue. So many factors go into a purchase decision (rational, emotional, experience, life stage etc) that individual triggers for switching can be difficult to identify. Long warranties do help acquisition but can have a sting in the tail if the service isn’t first class throughout the ownership life cycle. A positive experience at all touchpoints and making the customer valued is essential.
From a personal perspective I’ve had a strong relationship with a manufacturer for a number of years. I’ve replaced the vehicle regularly and the service overall has been good. Arguably there is no reason to switch. However, do I feel attached to the brand, I’m not sure. Am I a loyal customer, probably not. Would I switch if the service deteriorated or I had a bad experience, almost certainly.
The landscape for automotive customer loyalty is constantly changing. The rationale behind purchase decisions is becoming more complex. The common factor though is that customer experience is a critical factor in brand loyalty. If brands want to encourage loyal customers they absolutely must nail the customer experience, in and out of warranty.
Predicting the future is difficult, but in our whitepaper The future of Automotive Loyalty, we discuss this and a number of other factors impacting the industry.