Study Reveals What Consumers Think Of Extended Service Contracts

Lower-income consumers are more likely to purchase extended service contracts (ESCs) than those with more disposable income, and consumers are prone to buy ESCs for non-utilitarian items (Blu-Ray players, game consoles) over computers and printers, according to a study released by Carnegie Mellon.

Despite consumer advocate warnings that ESCs are bad deals for buyers, referred to as “money down the drain” by Consumer Reports, the ESC market on consumer tech is big business, accounting for more than 50% of Best Buy’s profit in 2004 (approximately $194.5 million), according to Business Week. Researchers at the Tepper School of Business examined consumers’ tendency toward ESCs, including which products consumers were more likely to cover, which class of consumer were likely to buy ESCs, and retailer actions that most influenced the ESC buying decision.

Gotta Have My iPod
The study found that consumers would rather insure hedonistic items (“pleasure purchases&rdquo like iPods rather than practical items like printers and computers for two reasons. One, because many fun gadgets stimulate the senses, particularly sight and sound, consumers tend to elaborate their value. Second, consumers seek to minimize the potential emotional loss should the product stop functioning. In other words, we are all very fond of our toys and don’t want them to break.

"Buyers often place more value on pleasure purchases, feel there is a greater risk to their well being if they do not function, and are willing to pay extra to protect them," said Baohong Sun, Carnegie Bosch Professor of Marketing and co-author of the study.

Also of note, consumers may seek to offset the guilt of splurging on a pleasure purchase by doing the seemingly responsible thing of buying a warranty.

Can’t Afford to Replace It
Those in lower income brackets are more likely to buy ESCs than consumers with higher incomes, simply because lower income consumers are more concerned with replacement costs. The study notes that since most consumer electronics are relatively inexpensive compared with other insurable items (cars, homes, jewelry), lower-income consumers don’t mind spending the extra dough. However, ESCs can add literally hundreds of dollars to the cost of an item (currently Best Buy charges $199.99 for Geek Squad’s LCD TV protection plan). Sun notes, “When you consider that low-income buyers are more likely to purchase ESCs, it is evident they can have a perverse impact on consumer welfare. They increase the price of goods for those who can afford it least."

The Unadvertised Sale
ESCs are big business, with major retailers like BestBuy, and more recently Walmart, counting on them to add big chunks to the bottom line. According to Consumer Reports, stores keep as much as 50% of what they charge for ESCs. As such, the retailers are savvy when it comes to pushing consumers toward ESC purchases. One trick is the unadvertised sale. Consumers are surprised by an unexpected discount on an item offered by a helpful sales rep, which then puts the customer in a position to spend the newfound savings on an ESC. This works on two levels, according to the study. First, consumers may consider the unexpected windfall as “house money” and make an unplanned purchase on an ESC. Too, the instant savings puts consumers in a good mood, which other studies show makes an individual more risk adverse. When feeling well, individuals are more sensitive to feelings of loss and more likely to guard against it.

Links:
http://blogs.consumerreports.org/money/2009/11/why-you-dont-need-an-extended-warranty.html

http://www.businessweek.com/magazine/content/04_51/b3913110_mz020.htm

 

Hi All,

I personally don't believe in the extended warranties, just be sure to test extensively during the 14 day return period.

Also, this is a warning to everyone about Laptop Depot who have a no return policy and ush these 'warranties'. They sold me a dud, said it was Core2Duo, then at home I find out it's Dual Core. I also found it was open box with no manuals or CD's, and the price was $100 more for a brand new one at Future Shop. They also did not disclose that all products are refurbished, and they have a no return policy. Clearly this one is a lemon as I don't think the Gateway NV54s would normally act like this.

Because there is no fear of returns, the sale guys there will say anything to make a sale - even if it is untrue. They have lied to me twice and now I am hoping Corporate will resolve this but I have not heard back yet.

BEWARE AND STAY AWAY FROM LAPTOP DEPOT!

 

I just get a new notebook before the warranty expires.
I can't justify paying $300-$400 for a 3 yr warranty... it's just not justifiable to me

 

It depends upon the devise, I hear about tv's giving out after the 1 year warranty (our tv is 18 years old).

But some people get the 4 year full warranty and before it runs out get a replacement. Chances are by then that computer is not being carried.

 

Ahh, I forgot to say about things other than notbooks. If it was TV that I thought I'd be happy with for 5+ years, then I would get a long warranty.

 

I have always purchased 5 years of extended warranties on my wife's and my laptops.

The previous 5 dell laptops we have owned all required new mother boards, and more, which are much more expensive than the warranty.
We also purchase the home onsight repair option which is really nice to have.

One of the reasons I bought a Lenovo over other brands was because they sell home onsight extended warranty contracts.

 

The biggest regret I have about my previous laptop, a Dell Studio 15, was sticking with the standard 1 year warranty. A few months into it, I had my old model (1535) replaced with a refurbished current model (1555), due to some issues with the 1535 that Dell apparently could not sort out. Long story short, my 1555 just died a month or so ago, barely two months out of warranty, and I've been stuck without a notebook for this time.

I just pre-ordered a new netbook, and I intend to get a 2 year ESC at the very least.

 

So this article basicly says that extended warranties are bad? I think if they give you a peace of mind and ensure you against high repair costs like motherboards, why not buy them?
Especially laptops tend to break quite fast, there's a big possibility your laptop dies withing 2-3 years. And as most consumers, who tend to use it for atleast 4 years, a waranty will definitly save you money. Don't you rather spend 300euros more so your laptop will last for 4 instead of 2 years, or would you rather buy a €1000+ every 2 years?

 

I firmly believe in extended warranties. If a product has a pre-sale warranty of 1 year, you start getting problems with it by 1 1/2 years. I bought an additional 2 year warranty for my HP Pavilion dv6314 and I had already got the video card replaced once as also the DVD writer which failed. Also the display got busted again, so it's proving to be very handy for me.

Tells you a little about the product quality itself, but an extended warranty can save a lot of headache for higher-end electronic products like laptops...

 

some guy with a xps m1710 went through 3 gpus. i wonder how much it would have costed him if the laptop was out of warranty.

 

What the OP's article says is true for SOME devices, but not for all others, and also highly depends on the expected lifespan, and outlay for the extended service agreement. My 2nd year warranty extension only cost me £40 on a £1600 laptop. The low cost compared to the goods gives me confidence not only that they are confident in the build quality, but also I now have peace of mind over any hardware defect, which aren't unknown in laptops, and means I can safely own this machine for 2 years, and can extend the warranty to 3 years if I decide to do so and pay another £40 at least 3 months before it expires

The study is partially correct, but unfortunately is very generic.

 

See my sig --- you may still be under the CC's warranty.

Werd. Its not a balck and white issue, whether to buy an extended warranty or not depends on expected lifetime, cost of warranty relative to product, convenience of warranty service etc.

 

I sell extended warranties at Best Buy for computers. I can tell you, some are not worth the price, but in fact, most of them really are. They tend to be worth it for laptops, considering that you get a free battery replacement under the plan, which pays for most of it (or more).

 

I paid for it with a Discover card. Go figure, the only one that doesn't do extended warranty.

 

Hm, Tech chick

But really, I think it depends. I think in this day and age its harder to persuade someone to put up that extra $100 - $200.

 

One thing I really hate is the fact that they try to give you an Extended warranty on EVERYTHING.

I even bought a ~$30 game (that plugged into the TV), and they asked if I wanted an extended warranty.

 

I have to sell these things at Staples and they're not the easiest things to do; but even our basic 2/3 year plans cover an LCD replacement, whether you break it, or it breaks itself. Accidentals are anything and everything but are more.
I don't see the need for them on iPods though, you should treat all your devices like they were worth 10k.

So personally, I wouldn't get 99% of the ones that came my way because I can fix most problems that could happen myself.

 

Here's a link to the original study paper:

http://www.tepper.cmu.edu/facultyAdmin/upload/ppaper_95062958787697_cks08-05-01.pdf

It's worth a read if only to see the primary results.