Should I buy an extended service warranty?
Dave, every time I go into the electronics store I have the same sudden anxiety attack about buying a new device: should I also buy the extended service warranty from the store? The salespeople are quite convincing, but I can't help but be skeptical about the whole deal. What's your opinion?
I think that extended service warranties fall into the same category as buying insurance: you're gambling that something bad with happen and you'll get your money's worth. But if you think about it, the odds have to be against you, just as they are in a billion dollar casino in Vegas. If it were any other way, they couldn't afford to build the casino in the first place, could they?
Insurance is in the same category. Ask any insurance agent if you're not sure. The overall revenue that they bring in from insurance payments must be more than the overall money that they pay out or the business would be losing money and they'd pack up shop and get a job at The Cup instead.
Now let's consider extended service warranties. Modern consumer electronics are commodities, which is to say that there's no difference in the product whether I order it online from Amazon or walk into Mike's Camera and buy it, other than the price (well, and sales tax and shipping, but bear with me).
This means that merchants have to compete on price and that instead of having those sales be highly profitable, they end up being fairly unprofitable because the margin, the difference between the price they buy it wholesale and the price they sell it, ends up being oh, so very thin. To make a long story short, stores don't really make money selling consumer goods any more.
So how does Circuit City, Best Buy, Ultimate Electronics and the rest of them make up the difference so that they are profitable businesses at the end of the year?
You guessed it. Extended service warranties.
According to "BusinessWeek" (Dec 20, '04), profits from warranties accounted for all of Circuit City's operating income and half of Best Buy's in 2003, just as an example. The authors of that article calculate that the profit on warranties is between 50% and 60%! That's a few years old, but Circuit City recently reported that extended warranty sales in December 2007 totalled $36.1 million, or 2% of domestic sales.
I like to look at the numbers, and my analysis suggests that these companies aren't offering the extended service warranty because they want to take care of me as a customer, but rather because it's darn profitable for them. Do you really need that $750 extra warranty for that fancy new HDTV? I bet you don't, in this age of (sadly) disposable electronics.
I also checked with my online friends via Twitter and universally it seems that savvy tech people do not buy them, other than a few people recommending AppleCare for Apple products. Maybe we should make an exception for computers and laptops since they're so darn complicated... :-)
More Useful d) None of the Above Articles:
✔ What's the most popular Halloween candy?
It's Halloween, All Hallow's Eve, and in the United States, at least, that means it's time for a strange custom that children throughout...✔ Review: Sony NEX-5N Digital Camera
This is a guest post by professional photographer Paul M. Bowers... I was born and raised in the briar patch of commercial photography-...✔ How do other countries celebrate Independence Day?
Hello Mr. Taylor. The other kids in my class say that every country celebrates Independence Day on July 4th and that it's a...✔ What is a ponzi scheme?
Dave, a friend of mine listened politely to my explanation of how a multi-tiered marketing system I've signed up for works, then told...✔ Update firmware on my Panasonic Blu-Ray DVD player?
I have a Panasonic DMP-BDT320 blu-ray DVD player and it's starting to report that I need a 'firmware' update or upgrade. I have...
Let's stay in touch!
Sign up for my weekly AskDaveTaylor Newsletter and you'll receive even more tech and gadget help right to your inbox, along with exclusive news and industry updates. It's good stuff. I promise!
I do have a comment, now that you mention it!
Check This Out Too...
Look for Answers
All Our Categories
Apple iPad Help
Articles and Reviews
Auctions and Online Shopping
Blogs and Blogging
Building Web Site Traffic
Business and Management
Computer and Internet Basics
d) None of the Above
Google Gmail Help
Google Plus Help
Industry News and Trade Shows
iPhone and Cell Phone Help
iPod, Sony PSP and MP3 Player Help
Kindle Fire Help
Mac OS X Help
Pay Per Click (PPC) Advertising
Search Engine Optimization (SEO)
Shell Script Programming
Tech Support Video Help
The Writing Business
Twitter, LinkedIn and Social Network Help
Unix and Linux Help
Video Game Tips and Help
Windows PC Help
Find Me on Google+
ADT on G+