The case at hand

As an example, we took a hard look at traditional go-to-market approaches and channel strategies for the auto warranty industry. We went back to the raw data and built up our own assessment of the total addressable market (TAM) and channel efficiencies. We found attractive opportunities in the misunderstood direct (DTC) channel.

Does your operating partner or consultant explore opportunities beyond what competitors are already doing? We do.

The Opportunity

The Direct-To-Consumer Extended Warranty Market

We found that DTC has a potential market size equal to the current warranty market, but DTC is the least penetrated of the total addressable market (“TAM”).

• Dealer POS:

  • 47% of the 2019 TAM

  • VSC and AP sold by franchise and independent dealerships for new and used cars

  • Experienced increasing attach rates (42–48% for new cars and 40–53% for used cars) over 2014–2019 period

• “Second Chance”:

  • 31% of the 2019 TAM

  • Dealers’ foregone opportunity. These are new and used vehicles sold by the dealership wherein the consumer did not opt for VSC and AP

  • Primarily a DTC opportunity that is valid from the year of sale and the interim before becoming Off Warranty

• Direct To Consumer:

  • 22% of the 2019 TAM

  • Net Vintage Vehicles off OEM warranty (3 years) and extended warranties (4 years) as well as a select % in 100,000–200,000 mileage category

A Competitive Channel 

DTC is still underdeveloped compared to the mature Point-Of-Sale (POS) channel

DTC offers an additional channel for reaching customers beyond the POS event that is still competitive and increasingly attractive. Let’s compare DTC to POS in several key dimensions:

Sales strategy

• DTC:

  • Reach potential buyers through direct mail, television, radio and digital advertising

  • Target consumers who have reached end-of-warranty on their vehicles or declined product at POS

• POS:

  • Leverage the vehicle purchase event to introduce the warranty products

  • Include the warranty price in vehicle financing at purchase to reduce the products’ perceived price

Revenue capture

• DTC:

  • 50% of customer price of contract after paying administrator and insurer. Must also pay price of customer acquisition, including cost of cancellations. As a result contracts are generally priced higher than at POS. Can capture greater portion of revenue by vertically integrating to sell and administer contracts

• POS:

  • Dealer captures 40%–50% of price paid by customer, with the remainder flowing to the administrator

  • If an agency involved, the administrator pays a commission to the agent from its dealer fee

Value chain

• DTC:

  • Primarily market and sell third-party products under their own or the administrator’s brand

  • May partner with a payment plan provider to provide customer with a monthly price

  • Generally do not take any claims or loss risk

• POS:

  • Primarily market and sell third-party products under their own or the administrator’s brand

  • May source products directly from administrators or work with an F&I agent to supply products and provide material training support

  • Many own the claims reserve which is administered by the product provider on their behalf to earn the excess reserve

Revenue Growth Potential

DTC channel offers significant near-term growth opportunities

Strong near-term revenue growth is possible with incremental improvements to lead conversion and more focus on sales retention.

Revenue gains can be achieved from:

• Better digital leads conversion and optimized spend

• Better direct mail conversion and optimized spend

• Favorable cancellation rates

Channel opportunities

Improvements in go-to-market capabilities could lead to better sales

A more effective channel strategy coupled with a higher targeted spend can greatly increase DTC warranty sales.

• Increased sales resulting from greater efficiency:

  • A more commercially effective funnel: Improved process and capabilities for lead generation, conversion and retention

  • Based on improvements in analytics, targeting, sub-segmentation and improved sales process (e.g., training, personnel, incentives, technology)

• Increased sales resulting from greater spend:

  • Expand demand and lead generation

  • Invest in brand marketing

  • Enhance digital channel focus and capabilities

  • Invest in multi-lingual marketing infrastructure

enduring strategies

Learn more about how we develop enduring strategies for varying economic cycles

See how we discover and evaluate investment opportunities in our previous installment, “Using economic scenario analysis to evaluate risk in the warranty industry.”