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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?

Dave's Answer:

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... :-)

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Categorized: d) None of the Above (Article 8015)
Tagged: amazon.com, best buy, circuit city, commoditization, service warranties, ultimate electronics
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Comments

Another thing to note is that the price of such extended warranties is not always fixed. We recently bit the bullet and got a large screen HD-TV. Naturally, we were offered the extended warranty by the salesman, which we turned down. When we were paying for the TV, the cashier noted that we didn't have the extended warranty on the purchase order, and asked us if we wanted to get it. However, the price she quoted us was about 1/3rd less than the first quote.

Posted by: Ken B at April 21, 2008 12:40 PM

I work tech support for a computer manufacturer, and while I might not suggest a store warranty with desktop computers, I do think that laptop users should at least think about it. My employer charges $600+ to repair a cracked screen and if you live in a house with rambunctious children or pets, paying for the warranty may be less expensive than fixing a dropped laptop.

Posted by: jeffrey at April 21, 2008 8:19 PM

I think in reality it depends on WHAT you are buying. For example, I recently purchased a front loading washer/dryer from Sears and took them up on a 5 year protection plan for $298.00. I receive annual maintenance for free, and in the third year there was a seal rupture and water all over the place. I forgot I had the protection agreement and local repairers gave me quotes of $300+ to fix it. I remembered my agreement and had it fixed for free.

Now, would I buy one on a microwave? No. Will I update it when this one expires? Depends on the cost of the extension. But what I do think is you should READ AND REALLY UNDERSTAND what you are buying BEFORE you buy it.

Posted by: Troy P at April 26, 2008 11:04 PM

I'd just like to say that after my 5th PS2 broke, I will always buy warranties on Sony game systems.

Posted by: Chris at April 27, 2008 7:48 PM

For what it's worth, count me in the always-buy-applecare-for-your-laptop category. I've owned about 8 Apple laptops, and the applecare was more than paid for by the 4 motherboard replacements one of my iBooks required (would have cost $3200 otherwise!) In fact, every one of my apple laptops has required major repairs within the Applecare period (4 different iBooks needed at least 1 motherboard replacement each.) As a long-time network admin at a Mac-based office, I wouldn't buy it for an Apple desktop, but a laptop? Absolutely, definitely, you bet, without a shadow of a doubt. Every time.

Posted by: Mike Kirby at April 30, 2008 7:28 PM

I have a lot to say, but ...

I have a lot to say, and questions of my own for that matter, but most of all I'd like to say thank you for all your efforts on this Web site by buying you a chai!

I do have a comment, now that you mention it!