Here’s The Right Way To Do Extended Warranties

Extended warranties.

They suck, right?

I should know, I sold ’em too. (Well, I sold a type of them when I was doing leases.)

Look, we all what the deal is: extended warranties are high dollar gambles that most often sit as piles of cash in a giant vault and the Scrooge McDucks that sell extended warranties just swim around in the money.

Last time I bought a laptop, I knew exactly what I wanted before going into the store. I went in, got a clerk to get me the laptop, and then braced myself for the silliness that would follow.

It was a dance: The clerk gave all the lines and I tried not to roll my eyes while I heard things like, “My customers are always glad to have it,” and “You just never know,” and my personal favorite: “more and more computers are breaking down these days.” Then I say no. Then they ostensibly go talk to their manager and come back with a slightly lower quote because they like me. Then I say no again and they wish me well and send me to the cashier.

Same thing happens when I rent a car. And when I buy one. And when I buy any major electronic equipment or appliance.

Sure, the money is good for the companies selling them but let’s face it, extended warranties are silly:

  • They are rarely needed
  • If a circumstance arises where they are needed, they are often forgotten

… they’re basically cash. And customers know it. So you either end up with a customer who begrudgingly pays, or you end up with a customer who chooses not to pay but is still annoyed anyway because they have to put up with the BS of the extended warranty sale pitch.

Every knows it’s just a bump in the price of whatever product you’re selling.

And if ever there was an opportunity for a company to innovate on the financial side of their products, extended warranties is the opportunity.

So, when I was bought a new freezer recently, I was pleasantly surprised…

I chose the freezer and braced myself for the inevitable extended warranty pitch.

I got ready to say “no” until the salesperson added: “If you don’t use it, you get 100% of it back.

That changed everything.

… If I don’t use the extended warranty, I get 100% of it back.

It works like this: I pay now for the extended warranty coverage. The freezer is covered for 3 years from all the various things that the extended warranty covers. And at the end of 3 years, if I didn’t use it, I get the money back. (Mind you, I get them money back as a store credit.)

This is a small change but it’s huge. I think it’s smart. And I think more and more companies should adopt it as a strategy to sell their extended warranties.

  • It’s still pure cash that piles up in your Scrooge McDuck vault so you can swim in it.
  • A few people will use the warranty, most won’t.
  • Those that don’t use the warranty feel like the store owes them money and will make a purchase at that store in three years.

So, this small change in extended warranties is a simple play to increase your income now but also lock in customers who will likely come back and purchase more. Because, chances are, if they have $50 or $100 or $500 that they think is owed to them by the store, they’ll purchase far more than that amount in a future purchase.

I’ve written before about how most guarantees are weak and I wished companies would give their guarantees some teeth. And this is a powerful extended warranty strategy that more companies should adopt.

Case study: Increasing profitability with passive income

Businesses survive (and thrive!) by continually generating income. But as a business owner, it’s easy to get caught up in a vicious cycle of performing a service, getting paid for it, performing another service, getting paid for it, etc.

That turns into a treadmill because you become dependent on that income and if you are not able to do the work, the income dries up. Additionally, you can’t grow beyond the time you have available to perform the service.

Therefore, if you are a business owner who wants to grow your business, you need to do it with passive income. Passive income is sometimes misunderstood. Some people think of it as “do-nothing-and-make-money”, which is basically impossible.

Rather, you should think of passive income as “work-once-and-get-paid-on-an-ongoing-basis”. That’s a big difference and successful passive income generation does require some initial investment of time, money, and effort.

Building passive-income-generating assets for your business is a great way to transition your business from a active (service-dependent) income to passive income. (If you’re looking for some ideas about passive income, check out this blog posts 5 levels of content monetization).

One of my clients came to me with that very problem. She is a well-known expert on the topic of finances but she was on a “treadmill” of services — consulting and speaking — that prevented her from growing her business a lot more. She had published one book, which helped her gain that expert status, but it was time to do more.

I brainstormed a few different options to help her generate some passive income and the one we decided to build first was an e-course that people pay to take.

First, we built a free e-course that provided great content. Second, we created a paid e-course that provided an advanced version of the free e-course. With so many people attracted to the free e-course, we were able to promote the paid e-course to a targeted, highly-interested audience, and people started paying my client for the course.

Just that one course wasn’t enough to completely replace and exceed the income my client was generating as a consultant and speaker, but that wasn’t her goal. Rather, she wanted to create a steady stream of income that continually trickled in, which is what is happening right now as people subscribe to her e-course.

And the best part is: Now that this e-course has been built once, it runs automatically and requires very little effort on her part to ensure that it continues. So the investment she made once will pay for itself and continue to pay her over and over again for years to come.

Here’s why I still do my own taxes by hand

It’s tax day today at my house.

Most Canadian personal income tax forms are due on or before April 30th, but the exception to that rule is if you own a business in Canada. Then your personal income tax forms are due June 15th. So I’m completing my taxes today and sending them in. (I didn’t mean to leave it until the last minute but some of the numbers for these forms are derived from my corporate income tax, which I just received back from my accountant on Tuesday afternoon).

It surprises people when they hear that I still do my taxes by hand — I write them out on the forms in pencil for the rough copy and in pen for the good copy. Very old school!

There’s a very simple reason for it:

When I used to be an employee (years ago), I would get my paycheck, look at the after-tax (take-home pay) number and be happy with that. I completely ignored the pre-tax amount and the enormous amount of taxes I was paying. And, like most people, I got excited when I received my tax refund… as if I had just won the lottery. But tax refund money is MY money and I had inadvertently loaned to the government as an interest-free loan. That’s why I think it’s a good idea to owe the government money on your income taxes.

After I started my business, I quickly became aware of the inordinate amount of taxes that one has to pay; I became increasingly aware of the disparity between my pre-tax income and my post-tax income. And, I started to learn about all the ways that businesses can legally reduce their tax exposure (i.e. with deductions for business expenses).

That knowledge (of my pre-tax and post-tax income, as well as opportunities to legally reduce the tax I pay) is worth thousands of dollars to me every single year. That knowledge is something I don’t want to lose. I want to be regularly reminded about the impact that every incoming and outgoing dollar has on my income tax. I want to be reminded that a big chunk of every dollar I earn is going to other things. I want to understand the influence that tax has on my business. It’s similar to why I mostly remodel my own home. The knowledge is very useful to have.

I could have my personal income taxes done by an accountant. Or I could do my taxes on software. But I know my myself well enough to know that as soon as I remove myself from sweating through those numbers with pen and paper in hand, that’s the moment I stop paying attention to taxes in my business. And before long, I’ll join the many people who mistakenly look forward to tax refunds and miss out on additional legal tax-reduction strategies.

So today, I’m sweating through some numbers and I’m probably in a bad mood (because I generally think I’m over-taxed and today of all days I definitely think that!). But it’s a good practice that I intend to maintain for as long as Canada Revenue Agency accepts paper forms.

Passive income versus active income

In this blog post, I want to talk about the differences between passive and active income and how they relate to your business.

THE BASIC DIFFERENCE BETWEEN ACTIVE INCOME AND PASSIVE INCOME

Active income is money you earn that requires your effort.

For example, if you sell a service that you must first complete – such as freelance writing, graphic design, etc. – you are being paid for a combination of time, skill, and effort. And if you don’t put in that combination of time, skill, and effort, you don’t get paid. Or if you sell a product that requires some work on your part (i.e. to assemble or customize or ship), that is active income as well.

Passive income is money you earn without any effort on your part.

For example, if you write a book, you can sell it and earn passive income because you only need to write the book once.

UNDERSTANDING ACTIVE INCOME AND PASSIVE INCOME

Active income is commoditized. You get paid proportionate to the amount of time, skill, and effort you put into the product or service you provide. In other words, for every product or “unit of service” you provide, you get paid. If you want to make more money, you have to provide more products or units of service.

Passive income is a bit of a misnomer. It should really be called non-commoditized income. When brand new entrepreneurs hear the words “passive income”, they start to salivate because it sounds like you’re getting a ton of money with no effort at all. Experienced entrepreneurs know that passive income takes some work to set up and run… but it’s non-commoditized because the money you make is not as closely tied to the effort you put in. You can start an ad-based blog and put in hours of time in the beginning to add content and market it, but you can easy up in the future as traffic builds. Eventually, you can run the business with very little effort on your part.

A good example of the difference between active and passive income is to look at two different real estate investors.

  • One real estate investor flips houses. She buys a house, fixes it up and sells it. That’s active income because she gets paid as long as she’s buying, fixing, and selling.
  • A second real estate investor rents houses. She buys a house and rents it out. There is a little effort in the beginning to buy the house and maybe fix it up a bit, and there might be some ongoing effort to maintain the property and collect rent, but ultimately it’s passive income because the second investor gets paid on an ongoing basis for her initial effort even if she doesn’t buy and rent any more houses.

WHICH TYPE OF BUSINESS SHOULD YOU RUN?

Your ultimate business goal should be to build a passive (non-commoditized) business that doesn’t require you to put in an hour of effort to get paid for that hour. But realistically, you need cash flow first and it’s very easy to start up an active income business that produces cash flow. So if you’re just starting out and you need some cash, start with an active business but immediately begin building passive income opportunities (i.e. ebooks, ads, and rental houses) into your business model.