It’s Your Business
- Author: Terry Greenhut, Management Editor
There was a time when selling transmission overhauls was a simple matter. Most shops offered one service at one price. If the customer approved it, the job was carried out. The problem with that one service was that many times it didn’t suit the needs of either the customer or the shop. If a customer wanted more than a 12-month/12,000-mile warranty he was out of luck. If the shop needed a way to make an overhaul more profitable it had a hard time finding one. So customer choices and shop profits were limited.
Over time somebody figured out that you could sell extended-warranty coverages of different lengths on the same overhaul. If it worked out successfully because the transmission made it to the end of the warranty without breaking, there was extra money to be made. That wasn’t a bad idea, except that when the insurance commissions in several states heard about it they decided that selling different warranties on the identical product or service was the equivalent of selling insurance, which was a regulated activity. Therefore, only registered companies could sell these so-called “policies.”
If you wanted to sell different levels of warranty you had to buy the warranties from one of these companies and resell them to customers, you hoped at a profit. The shop was usually on the hook for the first part of the warranty, and then, at some point, the extended policy would kick in.
There was a major flaw in this plan, though. How it got by the insurance commissions, nobody knows. The companies that were selling the warranties were, for the most part, not insurance companies. If you, or your customers, didn’t read the fine print you wouldn’t realize that these were just administrative companies that had bought some kind of a bond from a major insurance company to cover catastrophic loses up to a specified amount.
The problem was, and still is, that even though these companies had actuarial studies done to find out how long transmissions would last after they had been rebuilt, they could not control the quality of the product they were trying to warrant. Some shops, knowing that they were responsible for only the first part of the warranty, might have been shortcutting, knowing that if the customer kept the car for a while they would get paid if they had to redo the transmission. So when these administrative companies spent all the money they collected in premiums to cover their operating expenses, pay claims and make a profit, when the small bond they bought was gone, so were they. That left thousands of shop owners to cover warranties that they had paid the administrator to handle.
Why were the shops stuck for the warranties? Well, the fine print stated that the administrator warranted the job to the shop. The shop, in turn, warranted it to the customer. When the administrator was gone, the shop legally still had to make good, but it went beyond that. The neighborhood shop owner, who wanted to keep his customers happy, felt a commitment to handle those warranties even though he wasn’t being paid to do so.
After being burned a few times by new warranty administrative companies that swore they weren’t going to go out of business and leave their customers hanging, some shop owners figured out a way around this costly problem. They decided that if they were going to be on the hook for the warranty, anyway, they might as well make the profit. The only way to make that work was to offer customers different levels of service on a transmission overhaul. Each level had to be unique so that they weren’t selling the same service with different warranties. For example:
- For a three-year/36,000-mile transmission, the shop might replace every part necessary to bring it back to original factory specifications plus any recommended updates and several upgrades such as a heavy-duty torque converter; replacement of all bearings, bushings and thrust washers; new solenoids and force motors; an external transmission-oil cooler; new speed- and throttle-position sensors; a shift-improvement kit; an external filter; and three years of transmission power-flush services.
- A two-year/24,000-mile transmission also would be rebuilt to original-equipment standard and might include all the updates but only some of the upgrades offered with the three-year/36,000-mile warranty.
- A 12-month/12,000-mile transmission would be rebuilt to OEM standards but would not necessarily get any of the updates or upgrades of the more-expensive alternatives.
- Last, there could be a repaired transmission that might carry a six-month/6,000-mile warranty. It would get only soft parts and whatever hard parts were necessary to get it back on the road and functioning normally.
Compliance with the insurance regulations was only part of the issue. The other was the funding of the longer warranties. Some really smart shop owners started separate interest-bearing bank accounts in which they deposited any money they charged over and above the additional parts and labor required to bring the warranty from its basic level (let’s say 12 months/12,000 miles) to whichever one they sold (either the 24/24 or the 36/36). That money would be withdrawn only if it was needed to provide a warranty repair during the extended portion of the warranty, not the original 12/12, which would have been paid for out of the money collected for the basic overhaul and would be in the company’s general account.
The price of the upgraded transmissions was determined by the additional parts and labor involved to bring them to a grade high enough for the shop owner to feel safe in offering the longer warranties. So it isn’t a matter of selling longer warranties. It’s selling a better product that happens to come with a longer warranty.
If you’re thinking about doing this yourself there are some considerations:
- 1) The transmissions you build should be bullet-proofed to last much longer than the length of any warranty you issue.
- 2) Enough updates and upgrades must be sold at the higher warranty levels to cover costs of extended-warranty claims (if any) and to make additional profit.
- 3) The money you save in the “slush fund” to cover warranty claims is probably taxable (ask your accountant).
- 4) When the extended portion of a warranty expires, the money to fund it can be withdrawn from the “slush fund.” It then can be considered profit dollars and used somewhere else.
- 5) If you build the transmissions right, there is a good chance that if they make it through the initial warranty period they will make it through the extended portion as well.
- 6) People are funny. Even though many of them will opt for extended-warranty coverage, a good number of those who do will not keep the vehicle long enough to avail themselves of the benefits. Although they decide to buy the more-expensive package, once they do they begin to think about what other major component will break now that the transmission has broken. For many of them, within a year after they have had the transmission fixed, they sell or trade the vehicle.
Having control of the quality and the ability to sell the job at a high-enough price, you probably can afford to carry the warranties yourself and make good profit for the shop while doing it. So why be at the mercy of some administrator that might leave you twisting in the wind when you can get paid for taking a much more-controlled risk?
Visit www.TerryGreenhut.com.
