Guarantee your profits

By Gary D. Zeune, CPA
 
One technique to light a fire in your company is to provide an extraordinary guarantee. Extraordinary guarantees are above and beyond the industry standard. Extraordinary guarantees signal customers that you stand above the crowd. Second, extraordinary guarantees also signal employees that you believe they can satisfy customer demands. Extraordinary guarantees nearly always result in reduced operating costs, because the threat of pay-outs to compensate customers for failure focuses employees' attention on streamlining operations and internal cooperation.
 
For example, Mantis makes a small garden tiller. The company has been around forever. It’s guarantee was 30-day money-back. Even though the tiller cost only about $300, there weren’t many holiday sales. Why not? Because the ground is frozen. Sales were highly seasonal. Which made the company difficult to manage. So the company went to a full one year guarantee. Now the company is much easier to manage because production more closely matches sales. Want to see an extraordinary guarantee? Watch Mantis Tiller boosted profits by boosting its guarantee at www.TheProsAndTheCons.com/videos/.
 
I try to put my money where my mouth is and follow my own advice. In late 1994, I got a call from the corporate controller of a $1 billion public company based in Houston, Texas. Each year, the company holds a three-day meeting, bringing in about 25 division controllers from around the world. The controller had read one of my articles on benchmarking in “The Financial Managers' Report (AICPA),” and asked me if I give private presentations. When he asked how much I would charge for a half-day class, he about fell off his chair, saying that even though I would be the first outside speaker the company had ever engaged, the $6,000 price seemed awfully expensive. I told him that I don't carry receivables, and that I get paid at the conclusion of the presentation. I also told him I guarantee my presentations. So how does all this work? The controller was to bring a check with him to the class. If at the end of the class he wasn’t happy and didn't think they got at least ten times the cost of the class in benefit, he didn't have to give me the check. No questions asked. This is my guarantee:     
 
100% NO-RISK GUARANTEE
 
Mr. Zeune's courses are consistently rated at least 4.7 on a 5.0 scale. If you are not satisfied for any reason, there are no fees or expenses. Period.

 

Why do I give this guarantee? Because when customers and clients give you their hard-earned money, they do not want to take any risk with an unsatisfactory products or services. I risk my fee and all travel expenses each time I give a presentation. However, the guarantee overcomes price resistance. How? Because the client decides if the class is worth the cost. The guarantee signals that I’m confident in my work product. My accounting friends, billing by the hour for their work, can't believe I give this guarantee. “Too risky,” they say.
 
My response?
 
“How many clients do you think have refused to pay me?” (None.) After all, if a client isn't happy with my work when it's done and won't pay me, then what's the likelihood the client will pay me in 30 days if I send a bill? And if clients aren't happy with my work, why should they pay me?"
 
For example, during the presentation, the controller of the stainless steel tubing division asked how his division could use an extraordinary guarantee to different his product in the marketplace. Like all his industry competitors, his division guaranteed to meet customer specifications. He further explained that most of the division’s product is used to make shock absorbers and struts for automobiles. Quality is very high in this industry – meeting customer specs 99½ percent of the time. If a defective unit from the division caused a shock or strut to fail, the division gave the customer a credit for the cost of the defective component, less than $2. However, the cost of the failed component to the division’s customer was $100 to $400, which is the cost of installing a new set of shocks or struts. So I suggested that the division should give the customer credit for the full cost of replacing the shocks or struts on its customers’ vehicles, not just the cost of the components. In other words, make the customer whole for the damage your component caused. That demonstrates that you stand behind your marketing how good your product/service is.
 
Another example of an extraordinary guarantee can be found at Selectron. Based in Eden Prairie, Minnesota, Selectron repairs computer motherboards. Management at Selectron knows that if they repair a motherboard and it malfunctions a short time later, the customer will assume Selectron either did not repair it correctly or damaged it while fixing the original problem. Because of the company’s extensive experience, Selectron's solution that employees repair not only the original problem, but also parts likely to fail, and then guarantee the entire board for two years.
 
Selectron doesn't charge its customers for the additional repairs. Selectron found it was cheaper to repair an item likely to fail, while they had the board, than to deal with an angry customer, repair the motherboard, and still lose the customer's future business. How much business do you think Selectron has?
 
A couple of years ago, a consulting client introduced me to another business owner, a local roofing contractor. The economy was slowing down. The contractor didn't want to lay off employees, but didn't have the money to do any kind of advertising or marketing. Some feel the home improvement business doesn't have a very good reputation, and barriers to entry are low. Anyone with a tool belt and a hammer can be a contractor. Word of mouth, through satisfied customers, is the most effective advertising tool for small contractors.
 
But how do you spread the gospel? I asked my client if he guaranteed his work. “Yes, we guarantee materials and labor for a year," he said. "Have you ever called a customer near the end of the warranty period to find out if they need any more re-pairs done?" I asked. "No," he said. So, he set about calling customers whose guarantees were about to expire. The result? For every dollar he spent on repairs of items he probably would not have had to fix under the guarantee (because the customer didn’t know the roof needed to be fixed), he earned $11 in additional revenues from word-of-mouth advertising, plus more through referrals. However, you must state early in the conversation that the call is NOT an attempt to sell an extended warranty. When was the last time you called a customer asking whether you could repair something under warranty?
 
There was an additional benefit of the calls that I had not anticipated. The owner took the original estimate of the job to the client’s home or business. He often found that the homeowner initially wanted more work than was actually done. For example, the homeowner many times wanted a roof, siding, gutters and downspout. But upon getting an estimate of $15,000, the homeowner would have the roof repaired for $8,000. When visiting the homeowner to inspect the roof, my client would ask if the homeowner still wanted the siding installed. The answer was nearly always yes. Now who do you think the homeowner would ask to install the siding? My client. Marketing cost? Time to visit the customer.
 
Three things generally prevent an extraordinary guarantee:
 
·                                 Not having the ability to track and identify customer needs and wants;
·                                 Not generating enough enthusiasm in your employees; and
·                                 Not allowing front-line employees to take care of customer problems.
 
Yet only four things are required to implement an extraordinary guarantee:
 
·                                 Find out why customers do business with you. Hold an executive round-table discussion, then hold customer focus groups to get some preliminary ideas of what your customers think. Next, prepare a preliminary survey instrument. Finally, do a large scale survey.
·                                 Streamline operations. If you make it cumbersome for customers to trigger your guarantee, you've defeated its value and taught customers they can't trust you.           
·                                 Push decision-making down. Give front-line workers the training they need to take care of customers. Think of how much more time executives will have to work on important issues if they don't have to take care of minor customer problems. Plus, customers will be much happier if their problems are solved immediately, rather than waiting for call-backs or for other representatives to get approval to solve their problems. Enthusiastic customers are much more profitable. They’ll brag about you to others, who will then buy from you.
·                                 Make basic improvements. The first three changes are for naught if you don't improve the original service.
 
Extraordinary guarantees are a good idea if your company has achieved a high level of quality and the market hasn't recognized it yet. For example, car maker Hyundai initially had an awful quality reputation. Management made a commitment to be as good as, if not better, than the Japanese (think Toyota, Honda, etc.). But as we know from GM and Chrysler, once you have a bad reputation, customers won’t buy your product or service unless you stand behind your marketing. So what did Hyundai do? The company came out with the industry’s first 10 year/100,000 mile warranty. At the time an extraordinary guarantee. Sales skyrocketed.
 
When the economy tanked in 2008, even customers who had jobs, stopped spending. They had the money. They were worried they would lose their jobs. So Hyundai came out with its Assurance Promise. If a customer loses her job, the company will take the car back, with no hit on her credit rating. Hyundai was the only car maker whose sales went up. Why does the Assurance Promise drive sales. Because it removes uncertainty. It takes the job loss risk out of the purchase decision.
 
However, extraordinary guarantees are not a good idea if you aren't prepared to produce quality that you are willing to stand behind, or if your quality can't be recognized quickly enough to offset the costs of achieving it. Additionally, an extraordinary guarantee does not make sense if there are significant factors outside your control. For example, an airline would be foolish to offer an unconditional on-time arrival guarantee. No airline can control the weather. However, airlines could offer a no-mechanical-breakdown guarantee. Such a guarantee would signal to flyers that the airline maintains its planes in top condition. Finally, if the company has a few large customers, any one of which could trigger the guarantee and do serious harm, avoid an extraordinary guarantee.
 
Extraordinary guarantees send powerful messages to customers, but they have to be used with care.
 
Extraordinary guarantees can generate more business than you can handle — and that is dangerous. Find out what your customers value, and guarantee that attribute. Don’t guarantee something that is not critical to them. And make guarantees after carefully weighing whether the guarantee makes sense for your business. Hold focus groups. Send out surveys. Call your customers. Show customers their opinions count. Then show them their business is valuable by holding your products and services to higher standards than competitors by guaranteeing results.
 

Gary D. Zeune, CPA, teaches more than 100 classes annually in fraud, auditing, corporate strategy and performance measurement. He is the author of more than 35 professional articles, and the books, “The CEO's Complete Guide to Committing Fraud,” and “Outside the Box Performance.” Watch nearly 100 videos on his web site, http://www.TheProsAndTheCons.com. By Gary D. Zeune, CPA

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