Word Wednesday! Category: Warranty, Word: FREQUENCY

by Scott Walker on June 8, 2016
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It's Word Wednesday again at W3 Solutions!

This week’s category: WARRANTY JARGON

This week’s word: FREQUENCY

FREQUENCY: In the warranty world, frequency is considered the failure rate for the product that you offer a warranty on. For example, if 30 out of 100 iPhones break, the frequency rate on this product is 30%.

Why is “frequency” important to consider when running an extended warranty program?

It is important know what the frequency rate is so you can predict how many products covered by the warranty program are expected to break down.  You will then need to multiply the frequency by the anticipated average cost of repair; otherwise known as Severity (which we will explain in more detail next week). Once you know the Frequency and Severity you will be able to calculate your future claim costs. At that point you can determine how much money you need to sock away (Insurance Reserves) to pay these claims.

Simply put, if you don’t put aside enough money to cover the claims for the warranties you have sold, the next call you get will be from your bankruptcy attorney.  

Oh, and don’t forget to set money aside for your call center, someone has to answer the phone. You will also need some funds for adjudicators to administer the claims, finance to pay the invoices and reconcile your reserves, and don’t forget the commissions for your salespeople to sell the program. You get the picture.   It’s complicated.  But …if a warranty program is set up and managed correctly, it can double your profits, increase repeat business and build your brand.

Stay tuned and we will walk you through the best practices for setting up, implementing, and growing your warranty business. 5 steps to setting up a warranty program cta

Topics: Extended warranty, Profit, Warranty, Claims