December 12, 2013

The Warranty Genome:

Just as our genetic code determines traits such as eye color and behaviors such as left-handedness, so too does the format of a web page or the content of a communication determine the outcome of a transaction. To understand why some people buy a protection plan, we need to understand why others don't, and whether we can do anything to alter that outcome.

Ten years ago, the Human Genome Project succeeded in mapping the sequence of chromosomes and genes that define us as individuals. The valuable information this project unlocked continues to be applied not only in medicine but also in agriculture and anthropology.

More importantly, it allows us to build a scientific foundation regarding not only what makes us the same, but what makes us different.

It is this aspect of the project that led a warranty industry professional to deliver a presentation about the "warranty genome," and the evolution he sees coming in our approach to warranty management, thanks to online and mobile technologies.

Aleem Lakhani

Aleem Lakhani, executive vice president at AMT Warranty, said during his presentation at the Warranty Chain Management Conference earlier this year that an understanding of all the elements of the "warranty genome" can help us more completely understand the behavior of shoppers, and what makes some buy protection plans while others don't.

"It's not just a reference to a gene. The genome is the entirety of the organism. It has the DNA or the RNA. It represents all the hereditary information," Lakhani said. "We have to look at the totality of the individual, the totality of the consumer, and not just one segment of it, which is: did they buy the warranty?"

Lakhani looked at how the warranty genome is now evolving, after roughly two decades of online web-based electronic commerce, after six or seven years of smartphone-based browsing, and after roughly five years of widespread Facebook usage. In some ways, it's changing the way products are bought and sold. But in other ways, it's returning us to the old-fashioned notion of knowing your customer and how they like to shop.

"I thought this was a good analogy of what I believe is a way to treat warranty," he said. "If I was to draw parallels, I'd say we're looking at the totality of the individual, and what constitutes the fabric of that consumer. So it isn't just one isolated behavior. It's consumer behavior. It's consumer pre-disposition. And in there could be risk perception, financial tolerances, product preferences, monetary disposal, channels of transaction -- all of these things are uniquely individual to us, and we have evolving experiences and practices."

And as with the human genome, some of our past experiences can determine some of our future responses. "The encoding is the fact that there are certain antecedents or conditions that are going to pre-dispose certain outcomes. Those experiences will start to constitute our perception and our behavior towards how we transact."

A huge amount of time and money went into the Human Genome Project, which actually began with a series of meetings way back in 1984. It really got under way in 1990, and was declared to be largely complete in 2003. In the decade since, some 2,000 different genetic tests have been developed, more than 1,800 disease-causing genes have been identified, at least 350 biotechnology-based products are currently in clinical trials, according to a fact sheet posted by the National Institutes of Health.

The Warranty Genome Map

For the warranty industry, there's not yet a catalog of all the genes and all the mutations. But in his presentation, Lakhani did make an attempt to map out a rough sketch of some of the elements of its genome.

The following diagram is admittedly on the very small side. However, an increasing number of our readers are using small-screen devices to read their weekly newsletters, so we have to keep all our images under 500 pixels in width. Therefore, think of the image below like a double helix under a low-power microscope. To get a look at a larger image with higher magnification, simply click on the image below.

Figure 1
The Warranty Genome

The Warranty Genome

Source: Aleem Lakhani

As can be seen in the diagram, Lakhani has sequenced the chromosomes of the new access technologies along the top, and the chromosomes of the service providers along the bottom. The new technologies are social networks, mobile, and the web, while the service providers are the administrators, manufacturers, and the dealers.

Within each of the chromosomes are the individual genes, which provide functionality such as warranty analytics, search, customer relationship management, risk management, logistics and rules engines. Some genes, such as integration, are part of every chromosome, while others, such as claims administration or classification, are specific to just one.

Lakhani said it's not going to take decades or billions of dollars to complete the detailed mapping of the warranty genome. But it is going to take a change in focus from looking merely at who uses their laptops or smartphones to buy extended warranties, to a more detailed analysis of why some people buy, why some people don't, why some people completely abandon their electronic shopping carts in the middle of the transaction, and why some come back later. In short, we have to map all the small things -- the genes and alleles of the transactions -- to understand the big things -- the individual behaviors and outcomes of the transactions.

"That's at the highest, 20,000-foot level," Lakhani said. "Now, let's drill down. What are those events and actions that are relevant for us as players in the industry, that we need to be aware of? And as we start drilling down, it's a question of seeing the array of data that's starting to come through. And then, what does it all mean? How do we treat it? What is the salience of it? And then how do we manage it in terms of this genome?"

The Online Commerce Chromosome

Lakhani said the high-level trend in online sales and marketing is simply learning how to treat the individual as an individual. A good salesperson can look a consumer in the eye and figure out how to convince them to buy. A good web page should do that too. It has to be able to understand what motivates the customer, what they re

ad, what they skip over, and why they abandon their carts so frequently.

"Fifteen years ago it was small and inconsequential," Lakhani said. It's still only seven or eight percent of total retail sales, he said, but it's considerably more important in terms of research and opinion-making. Some people go to the store and do their research in person before buying online -- the so-called "showrooming" phenomenon. But others do their research online before going to the store to make the purchase in person. And some buy online and then stop by to pick up the merchandise themselves.

The challenge for third-party administrators and insurance underwriters is to become part of the process before and during the product sale. We only know about the instances where the product buyer also buys a service contract. We don't know much about the instances where a service contract offer was declined. And we know nothing about the instances where a shopping cart was abandoned.

"We've not really engaged our partners -- retailers and others -- in terms of how they participate on the web, because we don't control their websites or their digital assets. That's their IT department and their priorities. We are merely one of 8,000 SKUs or 10,000 SKUs that are being sold out there."

However, now there is better technology that allows more integration, in effect to allow an administrator to mind their own SKUs. In the old days, service contracts were grouped on the page with the accessories and other options. Or the service contracts were automatically bundled with the purchases and had to be manually declined and removed from the cart. Now, the service contract is once again an option, but it's given more prominence on the page.

"As the importance of this as a revenue and a customer service element has grown for a lot of retailers, we've started developing better strategies to gain more attachments," he said. "Today, the fact that the product and the service contract are seen hand in hand in the shopping cart is a reflection of the tremendous importance of it, not only from a revenue point of view, but also from a consumer perspective."

With certain products, he said, some consumers really do want the protection plan, and are disappointed when it's not offered. "It's not a trivial product," he said. "We know it's a significant product that people do take into consideration. From the empirical data we see, 50% of consumers who buy laptops and tablets buy service contracts. We know people who buy televisions buy service contracts at the 50 percentile level. Appliances are there too."

Lakhani said the administrator's job is to help the retailers understand the best practices involved. But to do that more effectively, administrators need more information about the online customers, and what they're doing before they hit the buy button.

"We need to start moving further. We need to start looking at browsing behavior," he said. "How many of us look at how many carts are abandoned, with or without the extended warranty? When people are browsing, what are they actually doing? Where are they going? Where is their mouse scrolling, and how long are they staying there? At what point are they reviewing the information about the service contract, and then either adding it or not to the cart?"

In other words, the administrator needs to offer advice, but that advice needs to be based on a more collaborative observation of the customer. "The data is not just transactional," he said. "The data is everything that goes into the transaction. As data becomes available regarding how you move your mouse on a page, I can see not only the clicks, but also your behavior, to see where it is you're focusing, to make interpretations of why you're focusing on that, and then to start driving behavior. As I get to learn more about the consumer and their browsing behavior, in addition to their transactional behavior, my ability to influence the web transactional format is also enhanced."

The power of such an approach would begin to take hold when the customer comes back to the website for another visit. Based on what they've bought before, and also what they browsed or abandoned, the pages would take on a customized look. It's the online equivalent of a friendly and familiar face.

"The more we learn about the individual, outside of just pure transactional information, but also behavioral information, now that deal becomes much more crafted and informed. We're not barraging the individual with nonsense -- we're starting to put information there that is meaningful."

In the old days, service contract administrators used to train the sales forces of their retail partners to look the customer in the eye and figure out how to sell the protection plan. Now, the administrators need to invest in some training of the web developers, to customize their behavior and their page layouts to match the needs of the customer, and to interact with them in a more interactive manner.

"Browsing data will allow us to understand your specific mannerisms on the web, so that when you go back, this algorithm will interact with you. We understand what information is relevant to you. We understand what information you'll dismiss. So the content will be more dynamic."

The Mobile Commerce Chromosome

Mobile phones are the next step in online sales. With a laptop or a desktop, an online shopping spree is the alternative to being there in person. With a mobile phone, you can literally shop online at one store while standing inside another.

In his presentation, Lakhani supplied some relevant data points: 37% of smartphone users take picture of the product they intend to buy; 32% use their smartphones to locate a nearby store; 31% use their devises to search for discount coupons; 30% use them to research the product and price; 28% use them to research the product and price at a specific store; 27% send product pictures to their friends; 24% read customer reviews; and 18% use their smartphones to check store inventory. In addition, 35% of those that actually made a purchase used their smartphones to comment in some way about that purchase, and 26% wrote a review of the purchase.

"The challenge I have seen from the warranty side of the equation is that everyone has to start having mobile-friendly sites," Lakhani said. "I think content has to be much more salient and meaningful in the real estate that a mobile device offers you."

Screens are getting larger, but the mobile pages are still very focused on doing one thing at a time. They have to be simple and easy to use. They can't be complex or cluttered. It's as if they're following the design pattern of desktop pages a decade or two ago, burying the protection plans with the accessories and making it easy to miss their existence. For the most part, the mobile sites are designed to sell just the product.

"I think where the opportunity happens for us is, again, back on the data side," Lakhani said. "We have all of this telemetry data -- GPS, geo-location -- and if we mine all of that data, we can support the delivery of information in a timely and geographically-sensitive manner."

With warranties, it's not going to be a case where someone passing by gets a coupon on their smartphone for a discount service plan. However, it could be a scenario where a customer who's bought appliances in the past is detected to be in the neighborhood, and is offered a service plan they didn't buy initially.

"From a genome perspective, I know you, or I'm getting to know you, and I need to ensure that whether you're using a laptop, tablet, or a smartphone, and wherever you may be -- in a store, mobile, driving somewhere, or networking with friends -- I can engage you to take action."

The Social Networking Chromosome

Take it a step further, and many sales sites are now using a Facebook account as a means for customers to identify themselves. Now imagine that information is combined with records of past purchases as well as current GPS location data. It's not out of the question for the owner of such a clued-in retail location to come outside to personally greet one of their best customers the moment they park their car. Why not do that online too?

It's all a matter of eye contact. Once you spot them, you behave differently. It would be the online equivalent of giving a celebrity the best table at a restaurant or the best seats at a sporting event. Once you've identified your best customers, you treat them special, even if they're shopping on a web page with a smartphone.

Furthermore, we're all critics. But on Facebook, some people are better at it than others. Of the 800 million active Facebook users, some 17% share their shopping experiences with others, while 13% post updates about the brands they like. What those amateur critics say about a place of business or the products it sells will have an enormous influence on others. Imagine that a data mining system could identify such a Very Influential Person the moment they arrive at a shop or a website.

We're not there yet, but we will be soon. Lakhani said it's the promise of the future rather than the reality of the present that makes social media worth examining.

"It's an emerging area, but it is rapidly growing," he said. "If we look at it in terms of what percentage of the overall transactions it represents, it's small. But it's growing very fast, and it's expected to evolve. So it's the medium rather than the volume that's important."

The promise of the medium is that it allows consumers to interact with not only each other, but also with the merchants and their brands. Lakhani said some 2.1 million consumers follow mass merchants on a social media site, while 769,000 follow a computer/electronics retailer and 592,000 follow a sporting goods retailer. And some of the results of those commercial interactions -- reviews, comments, likes, grades, etc. -- are going to influence other consumers.

"It opens up, from a warranty professional side, the ability for the individual to be influenced in the decision-making process for what they buy, including a warranty, and from the warranty stakeholder perspective, how we might be able to participate in that decision-making process, to affect the outcome.

"It's not just the commerce element that's important. When we look at the data, a significant number of the individuals that are going to be using social networks and other technologies will be doing so for purposes of doing product research, product reviews, and based on their experiences, making product commentaries. Therefore, that becomes a very important channel by which we have to be cognizant of how we deliver information. We have to use that as a channel for communications to end users about value propositions, about product experiences, and maybe even greater product value.

Lakhani said that insurance underwriters and third-party administrators are traditionally reactive, in the sense that they respond to claims. So if there are no claims, there's no communication -- no interaction. But with social networks, there can be interactions before, during, and after claims, and those interactions can be measured and classified.

"Rather than being a reactive tool, now we can through this plethora of information, make available those interactions. But what I think is also important to the genome concept is what kind of information we can extract from this that we can utilize to assist the consumer or influence that particular consumer's network. One individual networked to a hundred or a thousand means that our ability to have an outcome is not limited to one, but to the multiples of who they interact with in their social networks."

Consumers who write reviews or who influence others with their observations and opinions need to be engaged individually, whether they have positive or negative viewpoints. And the first step is to identify these influencers, and to figure out how to engage in communications with them specifically and individually.

"In the genome concept, it's about the unique individual," Lakhani said. "If we take aggregated data, and we just decide to treat everybody the same, then we're not being cognizant of the differences. I think social networks provide us with a vehicle for understanding the individual much better. It allows us to develop different algorithms and practices that will isolate influencers versus others, heavily-networked versus others, people who do research versus others, and people who comment versus others."

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