Monday, November 9, 2015

Know When No Warranty Is Best

As we watch the cheetah stalking a herd of gazelles on the African savanna, we notice how a few of the predator’s intended prey start hopping high into the air instead of running away. What’s going on?
     A theory of behavior called the Handicap Principle says that the hopping behavior signals to the cheetah that the gazelle is guaranteed to be highly fit and therefore not worth pursuing. And, indeed, the typical cheetah does favor pursuit of the running over the hopping gazelle.
     Researchers at NEOMA Business School in France and at The Korea Development Bank applied the Handicap Principle to exploring the question, “Is it ever better for a business to offer no warranty to customers than to compete by offering a longer warranty than another business?” The answer was yes, with the explanation that a store or brand offering no warranty is signaling that the superb quality of their outcomes makes an explicit warranty unnecessary.
     This can work because of the functions a warranty serves for the shopper. Shoppers usually prefer a product or store when it provides a warranty. However, people don’t buy a product principally because of the warranty. Researchers at University of Chicago and University of Singapore analyzed consumers’ reasoning about warranties for cars—an end-consumer product—and for computer servers—a business-to-business item. They found that warranties are more likely to influence purchases when presented in one or both of two ways:
  • “The warranty is like an insurance policy, letting you know that if anything goes wrong, your costs to make things right will be zero. You don’t need to reserve money to pay for repairs that are covered by the warranty.” 
  • “The warranty saves you from worry that you’ve made a bad purchase decision. There’s less uncertainty and more predictability when your purchase comes with a warranty.” 
     Shoppers think of the warranty more in terms of insurance against loss than in terms of assurance of product quality. They look elsewhere for cues of quality. If you exude quality as a retailer, think carefully whether you want to bring up the matter of warranties. To bring it up can distract from that focus on quality.
     You’d better be able to deliver, though. The physically fit hopping gazelle without a head start can still run away at more than 60 miles per hour if called on to honor the guarantee made to the cheetah.

For your profitability: Sell Well: What Really Moves Your Shoppers

Click below for more: 
Present Warranties as Insurance, not Assurance
Guarantee with Care

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