The Word on Warranties: Don’t Bother
http://www.nytimes.com/2006/11/01/technology/circuits/01warr.html
By DAVID S. JOACHIM
IT may be tempting to buy extended warranties with all those high-tech gadgets on your holiday list, but the experts say they are almost always a waste of money.
The experts have done the math, taking into account the odds that a product will break, as well as the price of a warranty versus the cost of repair or replacement. In almost every instance, these warranties represent pure profit for the seller and pure loss for the buyer, they say.
“Extended warranties are basically overpriced insurance products,” said Andrew Housser, a co-creator and chief executive of
Bills.com, a personal finance site. “At times it makes sense to buy insurance. It’s a good idea to buy home, car, life insurance. But those are priced in a very efficient marketplace.”
Because the insurance market is competitive and policies can be easily compared, insurance companies generally post profits in the 15 percent range, while electronics retailers generate margins as high as 80 percent on warranties, Mr. Housser said. That is a sign that the products they sell rarely break down during the warranty periods, making warranties a great deal for the seller but a bad deal for the buyer.
Indeed, Mr. Housser said, in many cases electronics retailers make almost no profit on the goods they sell; they make almost all of it on the sale of extended warranties. That may explain why salespeople put so much emphasis on warranties during their sales pitches, he and other experts say.
For years, Consumer Reports magazine has been telling its readers to stay away from extended warranties on most products, including cars, appliances and televisions, based on an analysis of repair records. Tod Marks, a senior editor, said the magazine’s surveys have found that warranties are an especially bad buy for items like computers, iPods, digital cameras and smartphones, mainly because prices for these products are always falling.
He calls a warranty on an item like this a “sucker’s bet.” “You’re betting that one, the product will break, and two, that it will break in the second or third year,” after a typical manufacturer’s warranty expires, Mr. Marks said. “And three, you’re betting that the cost of repair or replacement will exceed the cost of the warranty.”
For example, a recent Consumer Reports survey found that only about 10 percent of digital cameras broke during their first five years. For an extended warranty to be valuable, it would have to cost much less than 10 percent of the purchase price, since a camera with the same features will probably cost much less by the time you need a replacement. Yet a warranty on a digital camera usually costs 15 percent to 20 percent of the purchase price, Mr. Marks said.
The magazine’s surveys occasionally turn up examples of products that are better candidates for an extended warranty because of a high incidence of repairs. Early data on rear-projection television sets sold in 2005 and 2006 showed that 10 percent needed repairs (about three times the repair rate of picture tube and flat panel sets). Most repairs were bulb replacements, which cost about $400, including labor. So an extended warranty below that price might be worth it, Mr. Marks said.
But over all, extended warranties almost never pay for themselves. “If you’re someone who lies awake at night worrying, put that same money into a rainy-day repair fund,” Mr. Marks said. “Now you have the money to fix most problems. And if nothing breaks, go out to dinner and enjoy yourself.”
Risk aversion is a big reason why people keep buying warranties totaling about $16 billion last year despite the overwhelming evidence that they are a bad deal, said Amanda G. Nicholson, an assistant business professor at the Whitman School of Management at
Syracuse University.
“They have become more prevalent as we are becoming less capable of fixing things ourselves,” Professor Nicholson said. “Most of us don’t know how any of this stuff works.”
So many people will pay just about any price for peace of mind, even when an item is so cheap it is practically disposable. Professor Nicholson recalled that a colleague spent $15 on a one-time-replacement warranty for a $35 portable CD player for her 14-year-old son, because he is known to break things. “You could drop it in the ocean and they would replace it, and guess what,” she said, “he dropped it in the ocean.”
Paradoxically, the people who are late in adopting new technology buy the bulk of the extended warranties, even though the products are less expensive and more reliable by the time they are buying, said Amar Cheema, a business professor at
Washington University in St. Louis. He theorizes that these people are less comfortable with technology and thus more vulnerable to sales pitches for extended warranties.
“This is why you see them as an add-on cost that pops up after you have already made the commitment,” Professor Cheema said. “At the checkout, they say, ‘Hey, you just bought that for $900, pay just $150 for an extra two-year protection plan.’ ”
Buyers should be suspicious of these tactics, experts say, as well as offers to stretch out the price of a warranty over time, as part of a cellphone plan, for example. “From a budgeting perspective, $2 a month is nothing,” Professor Cheema said, “but if it’s $72 by the end of the period, it’s more than a new cellphone might cost.”
Mr. Housser of Bills.com says it is also worth noting that many retailers use third-party companies to honor extended warranties, and that can add red tape and time to a repair. “For them, any claim is a loss,” he said.
Of course, there is always the possibility that an expensive gadget will break, and you will wish you had bought the warranty. But experts agree that over many years of buying many products, saying no to extended warranties will save you bundles of cash.
Thursday, November 16, 2006 at 09:31AM 