Thursday, October 15, 2009

Should You Purchase that Extended Warranty?

It's no mystery that companies make a great deal selling customers extended warranties. If that's the case, then why do consumers keep purchasing these warranties? Clearly, they offer peace of mind. However, it may not be the economically sensible thing to do in many cases.

In today's Wall Street Journal, Neil Templin writes about the mistakes that we make with regard to extended warranties. Here's an excerpt from his column:

"There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget.The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price.That's not all. What if the company offering the warranty gets into financial trouble? asks Ram Rao, a management professor at the University of Texas at Dallas, who has done research on warranties."

Toward the end of the article, he quotes an official from Consumer Reports on the merits of purchasing an automobile extended warranty:

"If you have your heart set on a car that is unreliable, then [an extended warranty] is probably worth it," David Champion, director of automotive testing for Consumer Reports, told me. "But if you have a reliable Honda or Toyota, you should take the money and put it in a CD or money-market account. The odds are it will still be there when you buy a new car."

That quote reminded me of my response when my Honda dealer tried to sell me an extended warranty on my 2004 Accord. I stopped the sales person in their tracks and said, "I won't be needing one of those because I bought a Honda." She looked at me with a puzzled face, and then she got it. Honda Accords are incredibly reliable. I was buying a car which was not likely to break down. More than 100,000 miles later, I have never regretted my decision.


Melissa said...

Hi Mike,
I hestitantly purchased the 4-year warranty from Best Buy on my Asus computer. Two years into ownership an electrical surge caused the motherboard and other parts to die. Best Buy sent it to Geek City and it came back in fine shape. The repairs would have cost over $800. I paid $150 for the warranty. I also got the benefit of peace of mind even while my computer was running fine. I'm a fan of the warranty; it's sort of like an insurance policy for your investments.

Keith B Murray said...

Mike, what a great topic to consider! You are absolutely correct. I wrote a blog on this some time ago, but you're, I see, is more practical than mine, along I do give a more creative solution to extended waranty deciders. Here's the link if you want to see that my alternative is!

Keep up the good work--Keith.

John said...

This was a point of contention in my early marriage: me-against/she-for extended warranties. I relented and agreed to one on the express condition that if we didn't show a profit on the deal we'd never do it again.

My bride is the type of person who hears the parts wearing out *before* they break, and then relentlessly pursues the mfg.

If they ever learn how to underwrite these things, they'll never sell her another one.

The exception that proves the rule. Those things make no economic sense but are no match for my OCD spouse.

Brian said...

The beauty here is buyers compare the warrantee cost with their potential loss. This spread gives each individual buyer the incentive to purchase insurance. If the separation is eliminated, however, the ON AVERAGE cost is way too high. It's a marvelous prisoners dilemna. If the buyers could collude, they would pay much less. By keeping the buyers separate, the store can charge much more.

In many cases, the Internet has allowed previously common but separated interests to pool their power/resources. Perhaps this is another opportunity?

Richard said...

Great article. I think extended warranties makse sense in some cases for sure. I bought a DVD cam and no extended warranty for around $900. It broke after the manufacturer warranty expired after about only 18 months of light use. I took it in to estimate the repair (which cost me $75) and they told me it would cost $500 to repair!

So of course, I bought a new one instead (prices came down). I of course, bought the extended warranty on that one.

It also depends what peace of mind means to the customer.

One thing that is my weakness, is that I don't properly track where I put receipts or extended warranty documents. Nor do I register the warranty, so often I have no idea if I am covered or not. I also know some manufacturers now require customer to register the warranty to be valid.

When a problem happens, I spend so much time trying to find the paperwork, then figure out if the warranty applies, then contact someone and go thru the process, sometimes finding it isn't valid.

Sometimes I just don't bother. I recently signed up for this service, it should help.


Janice said...

I will always suggest to buy extended warranty for your precious devices and gadgets as it gives you a feeling of being relaxed towards your gadgets careWarrantech

AMT Warranty Corp said...

I think everybody should purchase extended warranty on purchased products One thing you should consider is what types of coverage items are included within the warranty.if the warranty covers only replacement parts but not time and labor expenses then perhaps obtaining this policy may not be a good investment read the policy terms and conditions before purchasing it.

AMT Warranty