Hold off extended warranties until you read this
morgueFile user ppdigital
COMMENTARY Some people find purchasing gifts the scariest part of the holidays -- trying to find the right fit for Aunt Mildred or Benny, the annoying office politician who sits two spots down from you. But no, these are minor travails. The real challenge is deciding whether to get the extended warranty.
You know the drill: bring something to the register, get ready to pay, and the salesperson asks if you want to extend the protection on that Wi-Fi-enabled mixer for the kitchen. The pressure's on. On one hand, retailers would love it if you always bought protection, whether you needed it or not -- it's a great boost to their profits. At the same time, those who say never buy the extended warranty are a little too quick and general in their advice. We talked with a number of experts to put together some advice on when, and how, to purchase an extended warranty.
Legalized betting, just like insurance
What bothers many people about extended warranties is that they are a bet by the retailer or manufacturer that chances are you won't need them. They act like insurance companies. The consumer pays a certain amount and the store or vendor essentially bets that, on the average, there's a low enough chance of people using the warranty that they're a way to effectively raise the price of a product. Here's how James Talaga, a professor of marketing at La Salle University puts it:
Similarly [to insurers], companies offering extended warranties would also make profits if the amount they receive in payments is greater than the amount that they pay out. So, if a firm offering an extended warranty has done its math well, when selling an extended warranty for $100, the firm would hope to pay out somewhat less. What this ultimately means is that the average purchaser of an extended warranty will also incur an average loss of somewhat less than the premium. This is where the issue of a person's risk tolerance comes to play -- if a person has low risk tolerance, they would be more likely to buy the warranty; if they have high risk tolerance, they would be less likely to buy the warranty.
You could also call it legalized betting. The question is how risk averse you should be. That depends on many factors, including the type of product you've purchased. "Often the cost of a single service call for a major appliance is enough to justify the cost of the extended warranty," says David Urban, executive associate dean and professor of marketing at the Virginia Commonwealth University School of Business.
Automobiles have become far more reliable over the decades. Ronald Montoya, a consumer advice associate for automotive website Edmunds.com, says that he bought a car last year and didn't bother with an extended warranty. "I figured I'd deal with a problem if it showed up," he says. Consumer electronics? A slightly different story.
If you thought that electronics products don't seem to be as hardy as in the past, you'd be right. "Today's TVs don't have the longevity of [old-fashioned] CRTs," says Michael Jay Geier, author of How to Diagnose and Fix Everything Electronic. (Disclosure: he's an old family friend.) The set that lasted long enough to become a social embarrassment to the owner's children might last only three to five years now. That's become a problem. "You're getting to the point where people are buying [flat-screen TVs] and want to keep them for a decade, and they don't last that long."
Bob Minhas, president of AlphaStarr Technical Solutions, a "technical concierge" business near Toronto, agrees that products today aren't built to last. Part of the problem is the increasing complexity and simultaneously shrinking size of electronics. There's more heat, more stress and more things that can go wrong. Although Minhas doesn't sell the gear nor the protection plans, he does suggest to his customers that they buy the extended warranties, and a good thing to hear him tell it. "I have a lot of clients that do [eventually use the extended warranty]," he says.
It depends on the type of product
Deciding on an extended warranty means balancing the chance of something going wrong and the ensuing repair cost versus the price of a new product. For example, Geier will consider an extended warranty on an expensive laptop if the extra cost is less than 20 percent to 25 percent of the original product expense, "but not for the $395 special at the big box store."
With the pace of change in electronics, you might want to get a new-model smartphone the next time your account is up for renewal. In that case, an extended warranty might not make sense because, on the average, you'll be getting rid of the product before you can use the protection.
Another consideration is whether you might have coverage you didn't realize. If you purchase with a credit card, ask your issuer about extended warranties. Many card issuers will add an extra year of warranty onto the manufacturer's warranty for products you buy with a credit card. If that gets you to two years of coverage, it might be enough for free (assuming that you aren't racking up the interest rates by carrying a balance, which could quickly negate any advantage you had).
Some up front research can also help you decide whether buying an extended warranty will make you save or lose money, because problems can even vary by model line from the same manufacturer. "For instance, laptops have been subject to issues with video chips in them running so hot that the solder joints weaken and [the chips] start coming off the board," Geier says. That would mean replacing the entire board, because almost no repair group has the very expensive tools necessary to fix the complicated assemblies. So a loose solder joint might require an entire new motherboard at a cost of hundreds of dollars.
Dos and don'ts for buying extended warranties
Sorry, there is no hard and fast rule to tell you what to do. But here are some pointers on how to be smarter about buying extended warranties and some things to watch out for:
Check the coverage dates. Many retailers will sell extended warranties that overlap with the manufacturer's warranty, so that "additional" three years of coverage might actually be only three years in total. Then again, if you can drop a problem product at a retailer and not deal with shipping costs and getting to a post office, you might see the extra cost as a convenience fee.
Scrutinize what the warranty covers. If you're prone to damaging products, unless the extended warranty covers such damage, it's a waste of time. In cars, it's common for some extended warranties to apply only to power-train issues, which means the engine and transmission. An electric problem that wasn't part of the engine would be an out-of-pocket expense for you.
Is shipping involved? If you have a big flat-screen TV out of warranty, who will unmount it from the wall, crate it up and ship if off, if those are the warranty terms? Understand whether you can drop a product at local spot or if you must do everything via mail or a shipping service.
Know who provides the service. Who is responsible for actually performing any repair? The older an electronic product gets, for example, the harder it becomes to find replacement parts. You want an extended warranty that will offer a replacement if repair is not possible for whatever reason.
Do you have to buy now? This is of particular interest in automobiles. Montoya says that you can generally get the auto manufacturer's extended warranty any time up until the original warranty expires. That should give you some space to see whether the car shows signs of having a citrus fruit as a parent, which lets you make a more-educated, less-rushed decision than right at the time you buy the vehicle.
Try to negotiate. This is another trick that works in the car industry but that you might be able to do with other types of products, especially more expensive ones. Extended warranties are high margin add-ons to a sale. See if you can get the salesperson to offer it for less to close the deal.
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pitches of retail clerks or sales associates.
With laptops, if one is risk averse to damage, then there is no program that exists that would justify the expense of adding a 2nd or 3rd year warranty to the laptop. Even with damage protection, the price/program cost ratios are exhorbitant.
The program admininstrators who design the extended plans do not have the consumer's best interest in mind. It's purely an actuarial calculation based on a small percentage of the plans purchased being used. In fact, they wouldn't offer these plans if the repair rates on any product line were inordinately high.
For instance, while there are some people that run into problems with appliances in the first few years, most don't. The plan administrators have been offering only +4 years on top of the 1 year mfr warranty since the beginning of the advent of extended plans. 5 years has ZERO to do with the product life cycle.
There is also a good argument that basic repairs and "how-to" videos are widely available on You Tube.
Consumer electronics retailers heavily rely on service contracts; Best Buy would not turn an operating profit without their "services." As a well-trained consumer, you'll invariably find at least one lie in most service contract representations at the retail level. Why do they want you to make a snap decision, eh? Buyer Beware.
If consumer electronics retailers had to compete without extended warranties and the lies that go with them, we might just have a better marketplace, better service, and a more pleasant shopping experience.
And consider facets such as the warranty requirements of Radio Shack on their in house universal remote. If your original goes bad, they will not provide a new one! Instead, you have to purchase an entirely new one, then apply for reimbursement. WIth the short lifespan of the original and the extra requirements for the warranty, you might opt for a more expensive, brand name remote, or buy a Radio Shack one and forget to request the repayment. In either, Radio Shack wins.
Comments like ericksherman's, though, exculpating corporate leaders as being "slaves to the system" themselves can be misleading to the point of being self destructive. Corporations don't get rich by doing things that don't benefit them immensely! Everything the corporations do is geared for one thing alone, benefitting themselves, and, by the "zero sum" mentality they use, that inevitably comes from raking the consumer over the coals! Cars built with trunk lids so unnaturally high and rear windows so criminally narrow that it forces motorists to purchase expensive closed circuit rear view television! Engineering shortages, like Cabbage Patch Kids refusing to expand staff even when demand was high; or Ty Toys ending production of Beanie Babies regularly, even on popular items, to make them "instant collectibles"; to even antique dealer James Carpenter buying up every last piece available of George Ohr's pottery, displaying them in museums, declaring them "valuable", putting artificially high prices on them and waiting for the flood of people who can't think for themselves to make him a millionaire. Designing packaging on products to hide the fact that people are paying the same price or more for less! Or, as with everything from bike riding helmets, to insurance to mini-fluorescent bulbs, conniving with criminals in office to pass laws making purchasing garbage products mandatory. And, of course, "programmed obsolescence".
To label corporate thugs as caught on a "treadmill" can be nothing short of treason against the welfare of the consuming public!
Why, for instance, must products always "get 'better'"? More complicated, more involved, more technical? At some point, couldn't a product get to the point where it does all that is required of it adequately? And, if it falls short, how does it hurt for the consumer to hone their own skills in living to fill in the gaps?
With a set of printed television listings, someone could, at a glance, see what is coming up. The schedules provided by many cable companies on screen now having to be scrolled through incessantly, and often don't extend many hours into the future. Too, you could always mark off on schedules what you wanted to see. That's not so simple with electronic schedules. You could always choose to forego one choice with a printed schedule but, if you program in something you might earlier have been interested in, then start taping something else, don't expect the notice about the earlier chosen show being available to come on the screen, ruining the tape. True, you can lose a printed schedule, but that can make you learn always to keep track of your possessions!
Therre has been no marked change in the lead pencil for a century, but does that disadvantage anyone?
In fact, many today are subject to an effect almost like hypnosis, suggestion, that, if something more complicated is out, even if it doesn't serve you better, it must still be "better"! What they once looked on with pride they now see as good only for the trash heap! They can never be content! They can never be at peace with themselves! They must always be buying!
I agree that all additions to products aren't necessarily good. But if they stop selling new products, what will the companies do? Find other types of products where they don't have any expertise?
What is wrong is a system that depends on continued expansion rather than sustainability. Consumers play as big a roll and could start saying no, simply not getting the next new gizmo. So long as you play villains and victims, you can't get close to a solution.
And, consider, one "reason" eriksherman posits for the incessant "updating" of products, that is, introducing new products that, frankly, could have been introduced prior but weren't, followed by the summary lack of repairs and support for the last line of product, is because, "if they slow down on getting product out, they're frightened that competitors will eat their lunch". But that puts the competitors in more control than the ones that are frightened, even though eriksherman insists they can't be considered, any of them, to have that much control!
And, of course, the "blame the victim" game, saying "regular" shareholders demanding that stock price go up. A well run company, not playing around with questionable product, inevitably increases in stock value, if only by the growth in population. But, then, consider that "regular" shareholders are regularly dismissed when they complain about quality of product or pollution, so why are the corporations going to pay attention to demands that they stick their necks out on questionable ventures simply because the "regular" people demand higher stock prices?
Maybe is CEO's didn't award themselves bonuses that were 150% of the corp[orations' total profit for the year, they would be able to do business in an honorable way!
Not surprising, too, the opine, "if they stop selling new product, what are the companies to do?" Nothing says the universe has to coordinate itself to necessitate this or that corporation continuing! Ronald Reagan spat in Americans' faces by praising "the right to fail", for small businesses, that is! And Ticonderoga lasted quite a long time selling a quality product manufactured in a reliable way, without unnecessary "improvements".
And people in the "rank and file" have been complaining about criminal practices in corporations for decades. When the corporations go too far, the charges can become the basis for government intervention. But the people could perceive corporate malignance even without being in the board rooms. So those who are in board rooms, even of other corporations, had to have been aware of them. They could be in a position to know more about those criminalities than the "rank and file" were intended to be. But they didn't say anything! Even about competitors, they said nothing incriminating! They are all a "good ole boy" network! If someone knows about criminal activity and doesn't reveal it, they are equally culpable! And every corporate leader knew about the criminalities that already have been revealed, and those due to be revealed, but stayed quiet! They are all crooks! Every single last one of them, those who committed crimes and those who refused to reveal the corruption!