January 27, 2011
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ISSN 1550-9214         

Home Warranties for Appliances?

Though home warranties are mainly for heating and cooling systems, and are closely tied to resales of existing homes, their ability to cover major appliances overlaps somewhat with store-bought extended warranties. Or does it?

As we continue our tour of the appliance service contract industry, we run into an area of potential overlap with the home warranty industry that we covered in a series of articles ending with the December 22, 2009 newsletter.

The potential exists that an existing home buyer will inherit a home warranty, will soon go shopping for new appliances, and will drop the home warranty because they bought extended warranties for the new units from their favorite retailer.

The potential also exists that when they buy those new appliances, and when the cashier or the salesman asks them if they'd also like to buy an extended warranty, they'll say no because they prefer to renew their home warranty annually.

Overlapping Choices?

In other words, when it comes to washing machines, clothes dryers, refrigerators, ovens, microwaves, ranges and dishwashers, a consumer has a choice between a home warranty contract that covers multiple appliances for one year, or a service contract that cover one appliance for multiple years. But is that a real choice?

The Warranty Group

Mike Frosch, president of The Warranty Group, North America, said each type of contract serves a different purpose, has a different duration, and carries a different price. "It's really the unique proposition of where somebody is in the buying cycle," he said.

Home warranties are great, Frosch said, when you're buying or selling a house and want to cover used appliances immediately. Service contracts are great, he said, when you're shopping for new appliances and want to extend the manufacturer's warranty for additional years. So in a sense, the coverage may overlap, but the offers don't really compete, he suggests.

"When you buy a home warranty, for the sake of argument let's say it's $450. It's a one-year coverage on used equipment. It's providing some coverage on some amount of appliances, but it's really about heating, air conditioning, plumbing and electric," Frosch said.

Selling Peace of Mind

"It gives you great peace of mind when you're buying a house, and you know nothing about this equipment. You're walking in cold. You're buying a house, but you don't have the history with it." In fact, he noted, it's frequently purchased by the home seller to reassure the eventual home buyer.

"On a new appliance, you buy a refrigerator, you spend $100, but you get a five-year warranty, because it's a brand new product," he said. "And when you buy an appliance, it makes great sense to get the five-year warranty, because it's the lowest price it will ever be."

So they don't really compete. "You can't buy a home warranty through an appliance retailer, and you can't buy a multi-year warranty through a real estate transaction," he said. "I think they're mutually exclusive based on the transaction, one being 'I bought a house and I want to protect a bunch of systems for a while,' and the other being 'I'm buying a brand new appliance and I want to get as many years of coverage as I possibly can.'"

The Warranty Group has experimented with new forms of pricing and distribution, Frosch noted, such as monthly plans that cover multiple new items. But the bulk of sales have remained close to the traditional models.

Opportunity to Choose?

American Home Shield

David Crawford, president and chief operating officer of American Home Shield, said home warranties and appliance service contracts could compete in some instances, but generally people don't have an opportunity to choose between them.

"A whole home warranty is a used systems and appliance program," he said. Service contracts are sold only when those systems are bought new. So unless the consumer is in the market for a new appliance, they don't really have a choice between the two. A service contract can be bought only when the product is new, while a whole home warranty can be bought at any time.

It's a bit like the potential overlap between a homeowner's insurance policy and a comprehensive auto insurance policy. Both might cover the theft of personal items left in the car, but they wouldn't normally be seen as competing. And that overlapping coverage would exist only when the personal item was left in the car.

They're also typically sold by different people at different triggered events. Extended warranties are typically sold at retail at the time of a new system or appliance purchase. Home warranties are typically sold during the home sales process, although Crawford said this also is slowly changing.

"We sell in far more channels than just real estate today," he said. "We'll work with any number of different partners -- mortgage partners, insurance partners -- to reach consumers that aren't buying or selling a home. Now, that's still a primary source of sales for us, but it's not the only one."

In addition, a whole home warranty is typically structured to deal with higher failure rates, Crawford noted. "If you look at any public data, you would see that the claims rate on extended service contracts is considerably less than with whole home warranties," he said. "But they cover the risk for multiple years, whereas whole home warranties incur the risk for a year on multiple systems and appliances."

American Home Shield, Crawford said, averages two claims per home warranty per year. The claims rate on a new appliance, he suggested, is far lower, especially when that unit is young.

Room for Both

NEW

NEW Customer Service Companies Inc., an administrator of extended warranties for several large retailers and a longtime sponsor of this newsletter, is a major service provider to not only consumers, but also to many appliance manufacturers, retailers, and repair service organizations, primarily through its acquisition of ServiceBench Inc. two years ago.

Jamie Breneman, NEW's senior director of marketing, said she thinks there's a role for home warranties to play, but that protecting products with an extended warranty is the right thing for the consumer. "It gives them an extension of their warranty and in the case of a service plan, additional coverage benefits. That said," she added, "whether it is a service plan sold at retail or a home warranty, the value provided to the customer is strong."

Breneman said she thinks that home warranties are particularly good for those products that come with the home -� existing products that the consumer already owns. They give the customer additional protection from many of the unknowns that are associated with used and perhaps aged products. They often also offer packaged protection for major systems such as HVAC, which may or may not be available for purchase at point of sale.

Accidental Damage Protection

However, Breneman said she thinks a service plan sold at point of purchase is a better option for new product purchases. "In addition to extending the manufacturer�s warranty, they also give the customer additional coverages that go beyond the manufacturer," she said. "For instance, accidental damage coverage on portable products such as tablets, notebooks, digital cameras and MP3 players. Service plans are also available on many products that are not covered under a traditional home warranty including many electronic devices, fitness equipment, and small appliances. Service plans sold at point of sale are also are not subject to a deductible."

Andrew White

Andrew White, president of Allied Home Warranty LP, suggested yet another analogy. It's a bit like comparing a single scoop at an ice cream shop to the half-gallons sold in a supermarket, he said. You don't think about price per serving or other comparisons. You look at what's available where you are at that moment.

So if you're not in the ice cream shop, or you're not at the supermarket, you're not going to buy ice cream. But if you're at one or the other, you'll make your selection based on what's for sale.

In the same way, White said, home warranties and service plans don't compete, though they may cover the same item. "They're confronted with these service plans when they're in the checkout line, typically, or in the sales process for an appliance." That's the specialty ice cream shop. And the home warranty is typically closely tied to a home sales transaction. That's the supermarket.

In addition, White said, the margins are different. In a retail sale, up to half the price of a service plan could go to the selling agent as a sales commission. With a home warranty, there may actually be rules against compensating the person recommending the purchase.

Who Provides Customer Care?

Another big difference White sees occurs when the retailer is selling an unrelated third party's extended warranties. In those cases, no matter how much the salesman promises to take care of you, they're not going to take care of you. Someone else will. In contrast, with a home warranty company, such as his, part of the appeal is that promise to be there when you need them.

White noted, however, that some regional appliance chains such as Conn's, P.C. Richard & Son, and Abt Electronics make a point of standing behind the warranties they sell. It's part of their effort to forge a long-term relationship with the customer, based not only on sales but also on service.

"There's something nice if they're going to support you and be that face to the problem," he said. "But if the retailer is not going to be the face to the problem, then you've got a bigger problem, because you just paid top dollar for a warranty and you're getting discount-level service."

In the name of customer service, Allied Home Warranty also helps its clients get a discount on new appliance purchases through its Texas Wholesale Club. White said it helps everyone. For him, it reduces claims costs by taking some old equipment out of the population. For his service providers who also operate storefronts, it creates an opportunity to sell some new units. And for his clients, it lowers the cost of ownership.

"We don't make any money on it whatsoever," White added. But he said it probably helps boost renewal rates. "If we can make the client's life better, then we think they become a long-term client. And we're happy to do it, even if we don't make any money on it."

Information Gap

Marc Roth

Marc Roth, president of Home Warranty of America Inc., said it's really a question of whether the consumer is aware of the choices, the prices, and the terms and conditions of each type of contract.

"Most of the time, the decision to buy an extended warranty on an individual white good is made when it's new at the counter, or right after the counter," he said. "And the concept of a home warranty -- while I think my industry should do a better job of alerting the consumer that they could buy this at any time -- [is closely tied to] a home sale."

Roth said he doesn't think most consumers are thinking of the costs vs. benefits of covering one unit for five years for $150 vs. covering multiple units for one year for $400. "They're just not thinking that," he said. And again, he said the thinks the home warranty industry could do a better job of educating the consumer about the alternatives.

He also notes that even extended warranty skeptics such as Consumer Reports readily concede that years five to seven are when major appliances are most likely to need service. So home warranties are covering these items "at or beyond the age when things are starting to break," he said.

Then again, Roth conceded that most of the claims cost of a home warranty comes not from the refrigerators and washing machines, but from the hot water heaters, furnaces, and air conditioning systems in the home. "They have the highest frequency of repairs needed, regardless of how old everything is," he said.

Service Fee

However, the annual cost of a home warranty isn't the only cost. There's also a per-house-call service fee of $40 to perhaps $60 that the consumer must pay for a home warranty claim. That's not typically the case with a store-bought extended warranty. So that also somewhat complicates the cost comparison, and gives the store clerk more ammunition to shoot down the benefits of the home warranty approach.

Roth counters that the frequency of claims isn't all that high during years two, three and four, which is where the extended warranties come into play. And, he said, even if home warranty companies dropped the service fee completely and raised their premiums to compensate, it wouldn't radically alter a multi-year comparison of premiums paid and claims made.

Steve Abernethy

Steve Abernethy, president and co-founder of SquareTrade Inc., said he finds home warranties to be "rather opaque." They seem to be less about customer service and more about reassuring buyers of existing homes. In other words, they look good until something needs to be repaired. "It's such a cartoon of bad service," he said.

In contrast, SquareTrade lives by its customer satisfaction ratings. Although for years the company made its money selling extended warranties direct to consumers, in recent years it's grown closer to retailers, particularly online sales outlets such as Amazon.com, Vann's Inc., and Abt Electronics (outside of the company's local area). And part of its appeal to those retailers is its ability to keep the customers happy.

Abernethy said he also thinks the cost of a home warranty, if it's covering just the kitchen and cleaning appliances, is a spectacularly bad deal. "You would never do it for just your fridge, range and microwave. It's just irrational," he said. But if it's also covering the heating and cooling systems, then perhaps it makes economic sense to pay $400 or $500 annually, year after year, plus $40 to $60 per service call.

Better Service, Lower Cost

The irony is that SquareTrade frequently makes an economic argument against the cost of retail extended warranties. But here, Abernethy is conceding that even the most expensive store-bought extended warranties are a better deal than the ongoing annual cost of a home warranty. And as much as he says he believes SquareTrade can deliver better service than some of the big chains, he said he thinks most of them can keep their customers happier than can the home warranty companies.

"My premise for SquareTrade is that obviously price is important. (And we focus clearly on that upfront, because that's what most people can see.) But service and speed around something as essential as a fridge, is also important," he said. "And you read these reviews where people are without heat or without a stove for weeks, and it just highlights that you have to research how good the service is before you buy."

Abernethy said consumers must do their online research, not only about the product, but also about the warranty and extended warranty. And they must compare the extended warranties not only on price and cost, but also in terms of what service levels to expect when there's a claim. And for that, he suggests reading some online reviews, checking with the Better Business Bureau, and talking to friends and neighbors. "The components I look at are speed: how quickly do they get their items fixed, and hassle: do they have to call five times and have three trips to get it fixed?" he said.

But how can this be possible? How can one administrator's service levels be higher than another's? After all, except for vertically integrated service operations such as Sears, it's highly likely that the list of independent repair service providers available in any given Zip Code will be the same whether it's a home warranty house call, an extended warranty appliance repair, or perhaps even a customer-pay job.

How to Run a Better Service

Abernethy disputes this. He said he thinks that even before a truck rolls, SquareTrade can deliver better service by making it easier for consumers to get copies of their contracts, easier for them to transfer their contracts, or perhaps even to cancel their contracts and get a refund. After an unsuccessful repair attempt has been made, he said he thinks SquareTrade makes it easier to authorize a replacement or a buy-out.

But even with the service providers, Abernethy said an administrator can affect the service level delivered to a consumer by making sure they arrive with the right parts, arrive on time -- indeed, that they arrive at all. And the administrator can do a better job of communicating with the customer, both before and after the repair. A well-timed email or text message can do wonders for customer satisfaction levels.

It's no different in the airline industry, he said. Some airlines now charge for luggage. Others charge for meals, or for pillows, or for itinerary changes. One discount European airline actually tried to charge for the printing of boarding passes and for visits to the rest room, until regulators interceded.

And then there are the airlines that don't charge for those services, and they also do a better job when communicating about delays and cancellations. Those are the ones Abernethy said he likes to fly with. "It's still the same equipment. It's still the same airports. But it's a completely different user experience," he said.

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