Nov. 25, 2005 - Question: The last time my family made a home electronics purchase, a clerk tried to sell us an extended service warranty. Are they worth the extra cost?
Extended warranties have become a big moneymaker for retailers in recent years, selling for well above their actual cost even as profit margins on products themselves are shrinking. The warranties are particularly appealing to retailers because they don't need to keep anything extra in stock to sell a warranty. Once such warranties are sold, the cost of repairing or replacing a product is nearly always shouldered by the service plan administrators and insurance companies, rather than the store operator.
Some companies also pitch warranties on goods as they're nearing the end of protection offered by the manufacturer, often contacting consumers by telephone.
But at the same time that businesses have expanded sales of warranties, most appliances and electronics have become steadily more reliable, said Claes Fornell, who directs the American Customer Satisfaction Index at the University of Michigan. Prices on everything from microwave ovens to CD players have also declined over time.
That sharply limits the odds that a consumer will need to repair or replace a product during the life of a warranty. If there is a problem after a few years, many products can either be repaired for little more than the price of a warranty or replaced at very low cost, said Mark Kotkin, associate director of survey research at Consumer Reports magazine.
Consumer Reports also suggests considering an extended warranty on treadmills and elliptical trainers — because they are particularly expensive to repair — and laptop computers, because some break easily.
Of course, retailers and the companies that back extended warranties know consumers are weighing the cost of the added protection against potential risk, said Jim Sebastian of SAFE LLC, a consultant to warranty providers. So most try to price warranties low enough that consumers, acting on impulse, see as worth the cost.
The idea is not so much to convince consumers that they'll be saving lots of money, as to offer reassurance and a sense of protection, Sebastian said.
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