ccs final report - indian institute of management...
TRANSCRIPT
Under the guidance of,
Prof. Srinivas Prakhya
Associate Professor, Marketing
Indian Institute of Management, Bangalore
Ayush Kumar
PGP 2015-‐17
Roll No.: 1511086
Dharmendra Hiranandani
PGP 2015-‐17
Roll No.: 1511091
Contemporary Case Study
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Acknowledgement We would like to present our sincere gratitude towards our guide, Prof. Srinivas Prakhya for his excellent guidance throughout the course of this project. The lengthy discussions in his office room were the source of immense motivation for us, academic and otherwise. His unwavering confidence in our abilities and his persistent encouragement made this journey thoroughly enjoyable.
We would like to thank our friends Mayank Agarwal, Ankur Jhavery, Rishabh Raj and Prabuddha Guha for the numerous discussions we had on the topic.
Contents Acknowledgement ............................................................................................................ 1
1 Objectives and Decision Problem ................................................................................ 1
2 Introduction ............................................................................................................... 1
3 Methodology .............................................................................................................. 2
4 SECONDARY RESEARCH .............................................................................................. 2
5 QUALITATIVE ANALYSIS .............................................................................................. 4 5.1 Laptop vs Mobile ................................................................................................. 4 5.2 Risk Hedging ........................................................................................................ 4 5.3 Ease of Service & Service Quality ......................................................................... 4 5.4 Repair Cost .......................................................................................................... 5 5.5 Hidden Costs ....................................................................................................... 5 5.6 Warranty Purchase Rationale .............................................................................. 5
6 Key hypothesis ........................................................................................................... 5 6.1 Qualitative reasoning .......................................................................................... 6
7 QUANTITATIVE ANALYSIS ........................................................................................... 7 7.1 Structure of survey .............................................................................................. 7 7.2 Survey participants .............................................................................................. 7 7.3 Survey questions ................................................................................................. 7 7.4 Survey analysis methodology .............................................................................. 7 7.5 Survey results ...................................................................................................... 8
8 Conclusion ................................................................................................................ 15
9 Way forward ............................................................................................................ 15
Appendix 1 (Questionnaire) ............................................................................................. 16
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1 Objectives and Decision Problem The aim of this project is to understand the uncover the underlying consumer purchase decision behaviour pertaining to extended warranty on laptops and mobiles. Under the purview of this project, we aim to answer the following questions through primary and secondary analysis:
• How do the consumers evaluate the warranty purchase decisions i.e. what is the decision making process behind warrant purchases?
• To test our hypothesis that warranty purchase decision depends heavily on useable life of the product.
• Does quality of extended warranty depend upon the position of the product in the Product Life Cycle (PLC) curve i.e. does warranty act as a differentiator for products in matured industries for e.g. PC/ Laptop industry.
2 Introduction To demonstrate the quality of the product to the consumers, marketers have increasingly started to use an indirect approach in the form of warranties. Warranties are not the intrinsic cue of the product but they act as extrinsic cues and helps consumers to make an inference of the product quality. In recent years much attention has been focused on the warranties provided on automobiles, laptops and other major consumer expenditure and durable items. Also retailers in the past decade have increasingly started to offer extended warranties on durable goods. These kinds of warranties provide companies with an additional source of revenue as in most of the cases the prices charged for extended warranties is on an average higher than the expected cost of repair. Warranties also appeal to the consumers by reducing their overall perceived risk.
For the scope of this CCS, we have decided to compare warranty buying decisions and consumer behaviour pertaining to two consumer electronic items namely laptop and mobile phone. In the early phase of the project, we had many consumer durables in mind like CFL bulbs, automobiles, luggage suitcases etc. but finally we zeroed down on laptop and mobiles. The reason for choosing these two specific products comes from the fact that despite of not much variation in their prices, the warranty purchase behaviour of customers pertaining to both the products is very different. This difference primarily arises because of the fact that the useable life of both the products is very different. So to further dig deeper and to uncover the basic consumer rationale behind their warranty purchase decision, these two products were chosen.
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3 Methodology Stage 1 -‐ Literature Review: To get a better idea on warranties and consumer behaviour pertaining to purchase of the same, we read and analysed the journal warranty policy and extended service contracts: theory and an application by V Padmabhan and Ram C Rao. The paper talked about how consumers try to maximise their utility and make a choice of warranty in the context of automobiles.
Stage 2 -‐ Qualitative Analysis: After Taking some cues from the journal we created a primary script for the in depth interviews. The interviews were kept open ended and to dig deeper, laddering techniques were used. A total of 7 respondents which were students from IIM Bangalore were chosen for qualitative analysis.
Stage 3 -‐ Quantitative Analysis: After getting rich insights from qualitative analysis, a questionnaire was created and IIM B students were chosen as the respondents set. A total of 42 students filled the survey and using the same statistical significance tests, Multivariate Regression, T-‐ tests, Hypothesis tests etc. were conducted to statistically test the validity of claims.
4 SECONDARY RESEARCH For consumer durables providing an extended warranty can be a profitable business, for few categories like laptops, automobiles etc. the warranty market has evolved greatly in the last few years. The focus of this research lies on two products, laptops and mobile phones. Warranty is one of the major factor that consumers seek for while making a laptop purchase, this is evident from the fact that almost all major players competing in this industry not only provide default warranty with the product but also have extensive plans for extended warranty that customers can choose from. Figure 1 provides default warranty and extended warranty options that brands provide to the customers.
Standard warranty
Extended warranty
Figure 1| Warranty trend in laptop | Source: Secondary research via company websites
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As is evident from the above figure that almost all major laptop industry players like Acer, Apple, Dell, HP, Sony and Toshiba provide an option of purchasing an extended warranty to the customers and all the brands provide standard warranty with the purchase, this is clearly and industry wise norm in laptop category. Few of the brands like Asus and Samsung which are relatively new entrants in the laptop industry provide an option of Extra Warranty at free of cost, which can be a technique for including their brands in the consideration set of the customer while evaluating different brands. Also, according to some scholars this of providing free warranty acts as an exogenous signal of superior product quality which seems like a fine strategy for companies like Samsung and Asus which already have a pre-‐existing brand equity due to their products in other electronic categories. The price charged by different players for the option of extended service warranty is provided in the following table:
Table 1| Extended warranty price in laptop | Source: Company websites and retailers
Brand Extended Warranty (years)
Price (INR)
Dell 2 9000 Hewlett-‐Packard 2 6500
Apple 2 16800 Lenovo 2 5000 Acer 2 8000
Though some brands in the above table provide extended warranty for up to three years but for simple comparison the time period has been taken as two years which along with initial warranty of one year almost equals the average useable life of a laptop. So, on an average the price of extended warranty for two years for laptop industry comes out to be around INR 7,500.
Warranty in case of mobile phones works differently, unlike laptops none of the manufacturers currently provide accidental damage warranty. The standard warranty that the phone comes up with covers only minimal functional features like problems with display, headphone jack etc. The following table provides complete information on warranties provided by standard and famous handset manufacturers:
Table 2| Extended warranty in smart phones | Source: Android authority, company websites and retailers
Brand Extended Warranty Available?
Extended Warranty Cost
HTC No N.A Samsung No N.A
LG No N.A Huawei No N.A
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Apple Yes INR 2,400 Sony No N.A
As is evident from the table above that warranty market has not yet developed in mobile phones industry. It is a point of parity in the industry to provide a standard warranty of twelve months which is just less than the useable life of mobile phone. Except Apple none of the manufacturers currently provide extended warranty and Apple charges a healthy premium for an extended warranty of one year. Later part of the report tries to uncover the reasons on why mobile phone manufacturers unwillingness to provide extended warranty.
5 QUALITATIVE ANALYSIS In qualitative analysis, we first performed focus group discussions. From the insights obtained, a sample questionnaire was created for in-‐depth interview and following that seven in-‐depth interviews were carried out. Primarily, laddering technique was used to understand the consumer behaviour, i.e., a series of Why? questions were used to uncover deeper insights about perception and ease of use of warranty. Based on the key insights we were able to a form a hypothesis regarding the stage of said industry in the industry life cycle curve vs the importance of warranty as a point of differentiation. This is discussed in detail in section 7.
The key insights achieved from the in-‐depth interviews are as follows:
5.1 Laptop vs Mobile The interviewees were more willing to take extended warranties in the case of laptop purchase, only a small proportion wanted an extended warranty in case of mobile phone purchase. The major reason that came out for this behaviour after we followed the laddering technique was that “people believed that mobile phones are a short term investment (1-‐2 years), so a warranty was not required in that case”. At the same time laptops on the other hand were a long term investment (3-‐5 years), so warranty becomes a necessary aspect.
5.2 Risk Hedging Most of the candidates told that they take extended warranty in case of laptops to hedge their risk as laptops are a bigger investment as compared to mobile phones (in terms of purchase price) for them. So, to hedge their product failure risk they were willing to take extended warranties in case of higher ticket item i.e. laptop.
5.3 Ease of Service & Service Quality Interviewees had negative stereotypes for the service quality provided by mobile phone companies when the product failed during the warranty period. Also, it was a tedious task
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to take mobile phone to the service centre and spend 2-‐3 days without any mobile phone. At the same time people had a positive perception for service quality they received for the laptops also one of the major feature that people mentioned about warranty of laptops was “the doorstep” service. So, ease of service of warranty in the case of laptops was much more as compared to that in mobile phones.
5.4 Repair Cost Interviewees had a built in expectation through prior experience in their minds that the repair cost of laptops was higher than that of mobile phones so to protect themselves from future spending they were willing to take extended warranty in the case of mobile phones. At the same time, they were reluctant to purchase an extended warranty in the case of mobile phone because of their pre conceived notion of higher repair cost in the case of mobile phones.
5.5 Hidden Costs Through prior experiences, few interviewees had a perception that there are a lot of hidden costs and many unknown clauses in the warranty that is purchased on mobile whereas the same is not true in the case of laptops. Two candidates experienced that even after taking a warranty on the mobile phone they had to pay some amount while claiming a warranty, since that damage was not covered under the warranty clause.
5.6 Warranty Purchase Rationale One of the important insight that we got from conducting in-‐depth interview was the answer to question, “What is the thinking process that people adopt while making a purchase decision for warranty (for any product)”, laddering technique was applied to get warranty rationale from the candidates. The relevant factors were:
• Total Useable Life of the product i.e. if extended warranty timeline falls between useable life of the product people have a higher probability to opt for warranty.
• People internally try to maximize their utility i.e. they try to compare actual repair cost without warranty and the price they have to pay for purchasing warranty.
• Like mentioned earlier people give good amount of importance to ease of claiming a warranty for e.g. on site warranty increases the probability of buying warranty.
6 Key hypothesis As discussed above, we used the qualitative insights to form our hypothesis around consumer’s behaviour around warranty. We hypothesize that the level of industry’s maturity, i.e., it’s position of industry life cycle, is an important determinant of the importance of warranty as a point of differentiation. This is more important in rapidly
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evolving and fast paced industries such as electronics. Also, we hypothesize that the relation between the two is directly proportional, i.e., higher the maturity of industry higher the importance of warranty as POD.
6.1 Qualitative reasoning This is because in a fast paced, rapidly evolving industry, a firm has to invest extraordinary amounts in R&D towards building a better offering. Hence, the key proposition that the firms offer are centred around innovation and superior offerings. Also, at this juncture it is very costly from the firm’s point of view to create an effective and efficient warranty and repair infrastructure. Not only it involves keeping an inventory of rapidly phasing out components but it also involves re-‐training the manpower with each new innovation. However, as the industry matures, the pace of innovation comes down, components become more and more modular (easy replicability and high legacy compatibility) and standardized (many vendors) and innovation related changes at all levels – architectural, platform and product are mere incremental. It thus becomes cost effective to provide warranty and the firm that builds its proposition around an effective and efficient value chain for warranty wins a higher market share. This phenomenon is visible in various mature durables industries, such as passenger vehicles (not considering autonomous cars), laptops, furniture etc.
We conducted a qualitative survey in order to further understand the consumer behaviour and explore this hypothesis.
Figure 1: Warranty and Product Life Cycle
Warranty as POD
Providing warranty costly
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7 QUANTITATIVE ANALYSIS 7.1 Structure of survey The survey was designed to capture differences in consumer behaviour for warranty for only two products: laptops and smart phones. These two are chosen as they are sufficiently distant on the industry life cycle and have different warranty related behaviour as per our focused interviews. We also suggest that different products such as cars, luggage (suitcases) and CFL lights should also be considered to provide an extensive understanding of hypothesized problem.
7.2 Survey participants The survey was floated among the students of IIM Bangalore as almost all of them use laptop and smart phone and are the decision makers/primary influencers during their purchase of these devices. In total 42 participants responded. We did not perform any demographic analysis as the sample are assumed to coming from homogenous population (IIM students).
7.3 Survey questions The survey questionnaire is available in appendix 1
7.4 Survey analysis methodology The argument we present is that if the survey suggests that warranty contributes to utility of laptops but not of smart phones, it can be inferred that warranty plays less role in a growing industry than a matured industry. To achieve this, we ask the respondents to rate the level of satisfaction from their last laptop and mobile purchases (this acts as proxy for satisfaction) and ask them for the determinants of their purchase decisions – broadly physical hardware specifications, looks and design, price and warranty level. We present the results in next section
Next, the survey asks the respondents to rate if they will prefer purchasing extended warranty in laptops, if yes than why. Similarly, the survey asks the respondents to rate why they won’t like to purchase extended warranty in mobile phones. With these we wish to identify the determinants of warranty decisions for consumers. Results are presented in next section.
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7.5 Survey results Question 1. Which product has LOWER usable life? (Usable Life: the time you use the product before changing it)
Answer 1. The survey respondents unanimously responded that mobiles have lower usable life. The sample statistics are summarized below in table 3. Also the average usable life for laptops and mobiles
are significantly different as presented in table 3.
Question 2. The two questions asking for satisfaction from laptop and determinants of purchase decision were regressed with satisfaction as the dependent variable and independent variables as hardware specifications, looks and feel, warranty period and price.
Answer 3. The result are as follows in table 4.
From the regression, the equation of linear regression was:
Regression Equation: Total_satisfaction = 0.9 + 0.6 Hardware + 0.2 Warranty + 0.3 Looks + e
So, if we take our level of significance as 10% then we can clearly see that Hardware Specifications (p-‐value = 0), Warranty (p-‐value = 7.8%) and Looks & Design (p-‐value = 3.9%) are the only significant factors of regression whereas surprisingly price came out to be a non-‐significant factor in regression.
Figure 2 | Usable life comparison
Table 3 | Usable life mean comparison through 2 sample t test
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Hence we can see that warranty is a utility determinant for laptops.
Table 4 |Regression summary for laptops
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Question 3. Similar survey questions measuring the level of satisfaction and purchase determinants were asked for mobile phones.
Answer 3. The answers are presented in table 5.
The coefficients of linear regression for satisfaction as dependent variable and purchase determinants as independent variables is as:
Regression Equation: Total_satisfaction = 1.9 + 0.72 Hardware + e
The only significant factor that came out of this regression was Hardware Specifications (p-‐value = 1.2%). Again for this analysis we have taken level of significance as 10%. The insignificant factors are Looks and Design, Warranty period and Price of the phone. Supporting our hypothesis is the result that Warranty period is a highly insignificant factor (p-‐value = 100%).
Hence warranty is not a utility determinant in smart phones.
Table 7| Regression Summary
Table 5 | Regression analysis for smart phones
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Question 4. Rate the following factors, based on their level of relevance while you are making a purchase decision for laptop.
Answer 4. The results are presented in table 6
To test the statistical significance of each factor, a t-‐test was conducted where mean value was taken to be 3 (Since, the responses are on a Likert 1-‐5 scale). The test was conducted on all the factors with 95% Level of confidence and all the factors came out to be statistically significant i.e. the mean relevance of all the individual factors while making a laptop purchase was much more than 3. Signifying all factors were relevant to customer while making a laptop purchase.
Result: Statistical Significant Factors: All factors statistically have more relevance than mean.
Question 5. Rate the following factors, based on their level of relevance while you are making a purchase decision for smart phone.
Answer 5. The results are presented in table 7
Again, to test the statistical significance of each factor, a t-‐test was conducted where mean value was taken to be 3 (Since, the responses are on a Likert 1-‐5 scale). The test was
Table 7 | Relevance of factors (smart phones)
Table 6 | Relevance of factors (laptops)
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conducted on all the factors with 95% Level of confidence and all the factors except warranty came out to be statistically significant i.e. the mean relevance of all the individual factors barring warranty while making a phone purchase was much more than 3. This analysis again backs a part of our hypothesis that warranty is not a relevant factor while making a phone purchase.
Results: Statistical Significant Factors: Except warranty all factors are statistically more relevant than mean.
Question 6. Will you purchase extended warranty for laptops and smart phones?
Answer 6. The results are presented in figure 4.
Almost three-‐fourth of the respondents claimed that they will purchase extended warranty while making a laptop purchase and only a meagre amount of 8% respondents were willing to take an extended warranty while making a mobile phone purchase. Again backing the insights that we got from in-‐depth interviews that since useable life of laptop is more as compared to phone so people tend to buy extended warranty in that case to hedge their risks.
Figure 3| Extended Warranty Decision
Laptops Smart phones
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Question 7. Rate the following reasons based on their importance, which contribute to opting for extended warranty while purchasing laptop
Answer 7. After getting the mean score, individual hypothesis tests were performed on each variable to determine if it is statistically different from a null score of 3 (indifferent score)
The results are presented in figure 5 and hypothesis tests are summarized in table 8
Table 8 | Hypothesis testing
Statistic
Ease of service (example-‐ at home service)
Initial warranty provided by company is much less than my usable life. Hence I'll purchase extended warranty
Design changes and hardware upgrades are rare in the industry
This is a costly purchase. I want to protect my money
Mean 3.68 3.82 2.75 3.96
Standard Deviation 1.12 1.09 1.04 0.79
z value 3.21 3.98 -‐1.27 6.43
p value 0.00 0.00 0.22 0.00
Hence it is observed that ease of service, warranty – usable life comparison and price of purchase are statistically relevant factors, whereas design changes and hardware upgrade is not. This is expected as it is a mature industry and only incremental changes are observed every year.
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Ease of service (example-‐ at home service)
Initial warranty provided by company is much less than my usable life. Hence I'll
purchase extended warranty
Design changes and hardware upgrades are rare in the
industry
This is a costly purchase. I want to protect my money
Not at all relevant Slightly relevant Moderately relevant Very relevant Extremely relevant
Figure 4| Extended Warranty Reasons
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Question 8. Rate the following reasons based on their importance, which contribute to NOT opting for extended warranty while purchasing mobile.
Answer 8. After getting the mean score, individual hypothesis tests are performed on each variable to determine if it is statistically different (higher) from a null score of 3 (indifferent score).
The results are presented in figure 6 and hypothesis tests are summarized in table 9
Table 9 | Hypothesis testing
Statistic Initial Warranty same as useable life Lots of hidden costs
Less ease of service
Performance degradation after repair
Mean 3.79 3.53 3.41 3.24
Standard Deviation 1.01 1.13 1.18 1.05
z value 4.56 2.73 2.03 1.33
p value 0.00 0.01 0.05 0.20
The only significant factor that is statistically higher than the indifferent value of 3 is that factor 1 which means that majority of the people don’t buy an extended warranty in the case of mobile phones because the perceived value of warranty in such a case is very low and people feel that the initial warranty that comes with the gadget purchase is equal to the useable life of the mobile phone so there is no need to buy an extended warranty.
Figure 5| No Extended Warranty in Phones
0
2
4
6
8
10
12
14
16
Initial warranty is almost same as my usable life. Hence I don't need extra warranty
Lot of hidden costs as a part of extended warranty so I end
up paying for damages despite taking warranty
Less ease of service (example -‐ no at home warranty
concept)
Performance degrades after repair takes place i.e. phone
has low repairability
Not at all relevant Slightly relevant Moderately relevant Very relevant Extremely relevant
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8 Conclusion With our preliminary study it is indicative that there is a correlation between maturity of industry and importance of warranty. Also, it can be inferred that the utility achieved from warranty can be replaced by other value proposition, of which, innovation and higher functional offerings are being employed by smart phone manufacturers right now.
We believe that currently, a smart phone manufacturer cannot create a point of differentiation out of warranty due to its prohibitive cost and instead should focus on improving the offering by investing the same amount in R&D. Currently, the standardization of parts is also not taking place in smart phone industry suggesting that supplier power is still high in this industry.
We believe that over time, as the industry matures, it will follow a template followed in laptop industry (or for any durable industry for that matter) and the importance of warranty as a differentiator will go up.
9 Way forward We wish to explore this topic further and build a model for all stages of industry life cycle. Intuition says that in inception/introduction phase of industry, warranty play an important role in bringing customer trial cost and perceived risks down and hence assist in customer acquisition. We wish to formally study the subject in greater detail.
We also want to substantiate our current hypothesis by conducting secondary field research and industry expert interviews. If we are able to predict warranty importance with a model, it’ll also help us in our future professional endeavours as managers and will help us take better decisions regarding customer warranty.