Subscribe / Unsubscribe Enewsletters | Login | Register

Pencil Banner

How small businesses can unravel the extended-warranty conundrum

Christopher Null | June 6, 2013
The conventional wisdom has always held that extended warranties are a sucker's bet. It's often said that businesses far and wide--from automakers to computer companies--make more money on the sale of extended warranties than they do from the actual products they make. Consumer Reports has led this charge for years, finding that retailers that push extended warranties and service plans keep 50 percent or more of what they charge for them.

The conventional wisdom has always held that extended warranties are a sucker's bet. It's often said that businesses far and wide--from automakers to computer companies--make more money on the sale of extended warranties than they do from the actual products they make. Consumer Reports has led this charge for years, finding that retailers that push extended warranties and service plans keep 50 percent or more of what they charge for them.

The logic is that, even though equipment of all kinds eventually breaks down, the extended warranty doesn't make sense because many needed repairs are covered by a standard manufacturer's warranty, and that once the standard warranty expires, equipment breakdowns are relatively unlikely. Further, even when things do break after the warranty has expired, the cost of repairs is not much higher than buying the warranty to begin with.

It all makes sense, but now the debate over extended warranties is raging again. An authority no less that the Harvard Business Review jumped into the mix last year with an interesting blog post in which writer Rafi Mohammed previously argued that Consumer Reports' analysis didn't include additional value that consumers and businesses receive from extended warranties.

Namely, this includes "peace of mind" benefits that can't be easily quantified financially, since an extended warranty takes the hassle out of those eventual repairs. As Mohammed notes, "Extended warranties mitigate the concern of being 'ripped off' on the repair, because service companies have an incentive to fix the problem efficiently. Bottom line: There's value in being able to sleep well at night."

There's truth to this. When I purchased a new car last year I sprung for the extended warranty, in part because it seemed like a real bargain, in part because the salesman noted that some of my options--including a pricey navigation system--were more prone to failure than the rest of the vehicle. Sure enough, a month ago, that nav system started acting up, and the company is replacing it with this year's model for free.

Mohammed has a similar story, involving a laptop that began acting up, his subsequent panic, and how he's now become a loyal Dell customer because of the speedy service he received when the machine was repaired. (That's also an important lesson for businesses that sell warranties: They aren't just financially lucrative; if you service them well you can make someone a customer for life even if their equipment breaks.)

When those failures happen, we're thankful for having the extended warranty on that specific device, and feel like it was money well spent. But we don't consider the other 10 extended warranties that we purchased but never used.These anecdotes are part of the reason why extended warranties work. Buyers have had an emotional experience involving something failing and either having to be replaced at great cost and hassle, or having been saved by the safety net of the extended warranty.

 

1  2  Next Page 

Sign up for CIO Asia eNewsletters.