You’ve made the decision and you’re ready to check out when the salesperson asks “Would you like the extended warranty with that?”
Your first instinct is to say no, but the salesperson who was so helpful, suddenly begins to detail a litany of things that could go wrong with the product. You break out into a cold sweat and your head starts to spin as you quickly try and decide what to do. DHC decided to investigate.
In a recent Business Week article, the magazine, using numbers from company reports and industry sources, estimated that extended warranties, accounted for all of Circuit City’s profits and 45% of Best Buy’s income. (Best Buy Co. is the largest consumer electronics retailer in Canada and owns the Best Buy and Futureshop chains.)
The margins on extended warranties are in the range of 60 to 70%. This means that when you buy an extended warranty from an electronics retailer, 60 cents out of every dollar goes to the retailer and 40 cents goes to the insurance company who actually insures the product. Of that 40 cents, 20 cents goes to paying claims and 20 cents is to administer the transaction and to provide the insurer with a profit.
So for every $1 spent on extended warranties only 20 cents is returned in the form of insurance payouts. With margins of 3 - 4% on electronics versus 60 to 70% on extended warranties you begin to understand why companies are working hard to convince consumers to buy an extended warranty!
Why should you buy an Extended Warranty?
The primary reason for an extended warranty is to give the consumer piece of mind. A fair bit of comfort is derived knowing that should a problem occur during the life of the warranty, the product will be fixed or replaced at no additional charge.
The extended warranty is simply a form of insurance albeit a very costly form of insurance since the cost exceeds the expected payout by 4 to 1. For this reason, consumer organizations such as Consumer Reports, counsel people to just say no to extended warranties!
Does it ever make sense to buy one?
In Consumer Report magazine’s January 2005 issue, the consumer protection organization lists two consumer electronic products where buying an extended warranty might make sense:
* plasma televisions and
* laptop computers.
Their rationale is that plasma televisions and laptops have a higher rate of failure and/or can be very expensive to repair.
The organization has published a chart, which can be seen here, that lists the odds of needing a repair of various household products . According to the site, the repair rate for laptops is 33%. This means there is a 1 in 3 chance, you’ll need to take your laptop in for repairs during the first three years of ownership.
Of interest to the Digital Home owner, projection televisions had a three year repair rate of 16%, camcorders at 11%, digital camera’s at 8% and Direct View televisions at 5 to 7%. Interestingly the rate for desktop PC’s was higher than laptops at 37% but repair costs are much lower.
The magazine had no repair rates for Plasma televisions because the products are relatively new but concluded in their summary that plasma sets run hot and use cooling fans which are susceptible to wearing out.
Next: Extended Warranties: Things to Consider
Extended Warranties: Things to Consider
The general rule of thumb is too avoid extended warranties however, if you’re the type of person who requires the piece of mind that insurance brings, then the following are things you should consider when you’re shopping:
* How long is the Manufacturers Warranty? - in the table below the cost of a 3 yr extended warranty for a $109 router is $30 for 2 years and $35 for three years. The manufacturers warranty is 3 years, so what exactly are you getting for $35?
* What required repairs does the Extended Warranty cover? That $600 or $800 for your plasma screen coverage doesn’t include fixing an all too real problem - burn in damage. Ask questions.
* How likely is the product to fail? - Consumer electronics typically fail early in their lifespan because of a manufacturing defect or after a long useful life. In the first instance, the product is probably covered by the manufacturers warranty. In the second case, the extended warranty has probably expired.
* What is the Expected repair rate? - as noted above, digital camera’s have an expected repair rate of 8% in three years. That means you’ve got a 92% chance that you won’t have a problem. In addition, a significant amount of the that 8% occurs in the first year when the manufacturers warrantee is still in effect.
* How much does it cost? - the following chart highlights the price of extended warranties for various products at various price points from a major Canadian consumer electronics retailer. Please see our comments after the chart.
Product Price Mfr.
Warranty Cost
2 Yrs
3 yrs
4 yrs
5yrs
LCD HDTV $4,499 1 Year 500 600 N/A N/A
Plasma HDTV $4,499 1 Year 600 800 N/A N/A
DLP HDTV $4,699 2 Years 450 490 550
Desktop PC $1,600 1 Year 240 280 N/A N/A
Laptop $1,600 1 Year 300 350 N/A N/A
Laptop $2,200 1 Year 400 450
Digital Camera $329 1 Year N/A 70 80 100
DVD Rom Drive $50 1 Year 15 20 N/A N/A
Router $109 3 Years 30 35 N/A N/A
A couple of observations from the chart above:
Products with more problems cost more to insure. - It didn’t take us long to realize that, on average, a Digital Light processing (DLP) high definition television (HDTV) will be far less problematic than a plasma or liquid crystal display (LCD) HDTV. We priced the extended warranty on all three HDTV sets of almost equal value.
The DLP set had twice the manufacturers warranty of the LCD and plasma, which indicates the manufacturer is more confident in its reliability. In addition, the 3 yr extended plan for DLP was much cheaper than LCD or Plasma. In fact, the five year extended warranty for DLP ($550) was less than the 2 yr plasma plan ($600) or the 3 year LCD plan $600). No 5 yr plans for LCD or plasma were even offered! This suggests to us that the insurer is also much more confident in the reliability of DLP televisions.
The Extended Warranty has no value. - note the router in our chart. The manufacturers warranty is 3 yrs. Why exactly are we getting that extended warranty?
Watch out for excessively high insurance rates - the warranty for our $329 digital camera is 21% of the purchase price for 3 years. The repair rate for digital camera’s is 8% and the reality is that after a year you’ll likely be able to buy an equivalent camera for half the price.
Is it really worth it? - we noted that it for 40% of the purchase price you can add an extra 2 years to your DVD-ROM drive warranty. Save the twenty bucks because in 2 years that’s about what a new one will probably cost you.
Next: Summary
Summary
The retail consumer electronics industry is a tough business to be in. New technology means stock can become obsolete overnight and margins are ridiculously thin. In an effort to beef up the bottom line and provide consumers with piece of mind, retailers have taken to aggressively selling extended warranty programs in order to stay profitable.
In our view, insurance is a valid purchase on high ticket items which can be ridiculously costly to repair or replace, however, the 60 to 70% margins on these extended warranties, suggest to us that Canadian consumers just say no to extended warranties.
If you very concerned about potential problems and really want to buy an extended warranty then negotiate a price for the product and then try to negotiate a price for the extended warranty. As indicated earlier, extended warranties sport a 60 to 70% margin. Rather than losing a sale, the retailer be able to “find a way” to knock the warranty cost.
Learn More and ask Questions
Find out more about extended warranties, HDTV’s, Digital Camera’s and much more on the Digital Forums. Membership is free and with over 6,000 registered members you can usually get answers to your questions fast.
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July 15th, 2005 at 11:35 pm
Extended Warranty
This consumer reports on whether it makes sense to purchase the extended warranty every sales rep pushes….