November 28, 2007

Extended Warranty Shopping:

Everybody knows that prices vary from one retailer to the next, but the prices they charge for extended warranties vary even more. And while some retailers sell their products low and their service plans high, others discount both while a few overcharge for both. So while some bundles are rip-offs, others could be seen as compelling bargains.

Cyber Monday, the last Monday of November, is allegedly the biggest day for online shopping. People who didn't get a chance to visit their favorite shops in person over the long Thanksgiving weekend supposedly make up for lost time upon their return to work by visiting their favorite Web merchants.

Do online shoppers buy as many extended warranties as their in person counterparts? They probably don't, if one believes that in-person sales pressure is an essential part of a winning pitch. It's just too easy to skip over the extended warranty offer's radio button while clicking your way to an online checkout. In fact, for some online sites it's downright difficult to find the links.

In an effort to update some extended warranty research published last year in the October 24 newsletter, this year we spent Cyber Monday shopping on some 45 different electronics retailers' Web sites. Last year, we shopped for a Panasonic TH-42PX60U 42" plasma television and a Canon EOS 30D camera. This year, we're going to shop for more items throughout the holiday season, but we're going to kick things off with a roundup of prices for a medium-sized Samsung LCD television and a large Philips plasma screen.

Products & Protection Plans

At each of the 45 sites, we priced the two televisions and their extended warranties over terms ranging from two to five years. Not every retailer had both televisions for sale, and very few retailers had more than one or two extended warranty offers per TV set. And while there was some correlation between high product prices and high extended warranty prices, for the most part they varied independently.

Last year we chose a 42" plasma set that retailed for around $1,600. Extended warranties ranged from $79 all the way to $800. In percentage terms, the price for the service contract was between 6% and 42% of the price of the TV. The average, however, was more like 15% to 20% of the product's price.

This year, the product prices were a little lower, but the range for the extended warranties was actually a little wider: 5% to 51%. However, the average extended warranty was still around 15% to 20% of the underlying product's price.

Let's start with the smaller TV, a Samsung LCD unit with a 26" diagonal screen, Model LN-T2642H. We found 29 retailers selling that particular model along with extended warranties, and one more retailer selling a comparable unit with comparable extended warranties.

Short and Long Extended Warranties

In the tables below, we combined the two- and three-year warranties into one list and the four- and five-year warranties into another list. To tell the truth, there weren't as many two- or four-year extended warranties as there were three- and five-year plans, and we suspect that some of the two-year plans actually didn't commence their coverages until the one-year manufacturer's warranty had expired. So it made more sense to combine them than to present them separately. Only one vendor -- PC Richard & Son -- offered both two- and three-year terms.

In the list below, the televisions range in price from a low of $600 at J&R Electronics and $619 at both B&H Photo and DataVision to a high of $750 at Sears and PC Richard & Son. The extended warranties range from $50 at Adorama and $59 at both Wal-Mart and Target to a high of $229 at DTV Center and $200 at both LCD TVs and Plasma Bay.

Table 1
Samsung Model LN-T2642H 26" LCD TV
Product & Extended Warranty Price Comparisons
(for Two- and Three-Year Service Contracts)

  Retailer  TV Price in $  Extended Warranty
Price in %

  Adorama $631 8%
  Target $720 8%
  Wal-Mart $688 9%
  Beach Camera $638 9% $638 9% $629 10%
  PC Richard & Son $750 11%
  Ace Photo & Digital $697 12% $729 13%
  Crutchfield $680 13%
  B&H Photo $619 15% $650 15%
  Bright & Sleek $701 15%
  J&R Electronics $600 17%
  Sears $750 17%
  AV $729 17%
  Vann's $680 18%
  New Egg $650 20%
  US Appliance $719 21%
  Mac Mall $630 22%
  Circuit City $650 23%
  Butterfly Photo $633 24%
  DataVision $619 24%
  LCD TVs $633 31%
  Plasma Bay $630 32%
  DTV Center $683 34%

In percentage terms, the $229 that DTV Center wants for a three-year extended warranty represents fully 34% of the price of the TV. Meanwhile, the $49.95 pricetag of a Mack extended warranty at Adorama represents a bit less that 8% of the price of the product it covers.

We're not trying to say that the extended warranties are identical in every way but price. However, the products they cover actually are identical, which means that the differences among the extended warranty prices are not caused by differences in quality. We have to assume that the Samsung LN-T2642H is going to break down with the same frequency no matter who sells it.

Tremendous Price Range

However, we could be persuaded that certain repair centers could fix it for less cost, allowing for lower contract prices. And we could be persuaded that in-house repairs would cost more. And there are numerous other cost differences, including the fact that some of these contracts don't start until the manufacturer's warranty ends. But is there enough to merit a range of 8% to 34% or $50 to $229?

Next, let's look at the same product with a longer extended warranty plan. Prices are of course going to be somewhat higher for four or five years of coverage, because there are likely to be more failures over twice as many years. Will there be twice as many failures? Not if the pattern looks like a bathtub, with lots of initial failures and then far fewer in the midlife, followed by gradually rising failure rates as the product ages.

In Table 2, the four- and five-year extended warranties range in price from $88 at Wal-Mart and $100 at Best Buy to $299 at LCD TVs and $349 at DTV Center. That's a spread of 13% to 51%. And yes, that means that some online retailers, such as DTV Center, are expecting customers to pay more than half the price of the TV for their extended warranty. They probably also expect their customers to be incapable of doing that math in their head.

Table 2
Samsung Model LN-T2642H 26" LCD TV
Product & Extended Warranty Price Comparisons
(for Four- and Five-Year Service Contracts)

  Retailer  TV Price in $  Extended Warranty
Price in %

  Wal-Mart $688 13%
  Best Buy $720 14%
  Crutchfield $680 18% $629 19% $650 19%
  Bright & Sleek $701 20%
  ABT Electronics $748 20%
  PC Richard & Son $750 20%
  J&R Electronics $600 22% $729 22%
  Sears $750 24%
  Preferred Photo $561 25%
  Camera Addict $561 26%
  DataVision $619 29%
  Vann's $680 29%
  AV $729 29%
  B&H Photo $619 30%
  New Egg $650 31%
  US Appliance $719 35%
  Mac Mall $630 35%
  Circuit City $650 35%
  Plasma Bay $630 40%
  LCD TVs $633 47%
  Butterfly Photo $633 47%
  DTV Center $683 51%

Here's where we part ways with the researchers over at Consumer Reports. They believe extended warranties are almost never a good value, because the products seldom break, and if they do, they would cost much less to fix on a pay-as-you-go basis. We believe there is a price ratio between a product and its extended warranty that even the Consumer Reports editors would concede is a good value, if only they took the time to examine the differences in prices and coverages.

If the TV is $683 and the extended warranty is $349, it's probably not a good value. But if the TV is $5 more and the warranty is $290 less, it might be worth considering (unless the policy is loaded with exclusions and disqualifications). And with problem-prone products such as rear projection TVs, or for no-name brands that don't even bother making spare parts, an extended warranty could actually save money over a pay-as-you-go system.

In other words, yes, there is a price at which an extended warranty is a rip-off. But there's also a price at which an extended warranty is a bargain. We suspect there are few at each extreme, but the point is that these extremes exist, as these charts show.

Pricing the Bundle

If consumers were to begin pricing the bundle of an extended warranty and a TV, instead of pricing just the product, some additional bargains begin to pop out. For instance, the TV and a two-year warranty is $689 at, and the TV and a five-year warranty is $800 at Crutchfield. J&R Electronics has low prices for both the product and its extended warranty, with the bundle priced at $700 for three years of coverage and $730 for five years.

Now let's look at a very large 50" plasma television made by Philips Electronics. Model 50PFP5332D is marketed as a high definition unit, but given its size it's a bit disappointing to see it has only 720 vertical scan lines as opposed to the 1080 found in many of he other high definition units of the same screen size. Then again, those other TV sets won't be found selling for $1,500 this holiday season.

In Table 3, we'll look at the shorter extended warranties, and in Table 4 we'll look at the longer plans. The lists of retailers are a little different, but the same patterns seem to hold. There are wide differences in both the price of the product and the price of its extended warranties. While in percentage terms there are no plans pegged at more than half the price of the product they cover, that may have more to do with the higher product price. Nobody, it seems, can imagine charging $750 for an extended warranty, but $600 is not out of the question.

Table 3
Philips Model 50PFP5332D 50" Plasma TV
Product & Extended Warranty Price Comparisons
(for Two- and Three-Year Service Contracts)

  Retailer  TV Price in $  Extended Warranty
Price in %

  Target $1,700 5%
  Wal-Mart $1,397 6%
  Limited Goods $1,490 6% $1,679 8%
  Mac Mall $1,430 9% $1,477 9% $1,525 10%
  Beach Audio $1,359 10%
  AV $1,700 10%
  Bright & Sleek $1,679 11%
  Butterfly Photo $1,400 13% $1,545 13% $1,770 13%
  123 Buy Direct $1,899 14%
  Circuit City $1,900 15%
  American Home & Office Technologies   $1,900 16%
  Focus Camera $1,549 16%
  LCD TVs $1,599 16%
  Ace Photo & Digital $1,545 16%
  Best Price Audio Video $1,555 17%
  HiFi Trader $1,589 18%
  Plasma Bay $1,609 19%
  Sears $1,600 19%
  CompSource $1,518 25%
  New Egg $1,600 25%
  TriState Camera $1,537 26%
  Prestige Camera $1,325 43%
  Broadway Photo $1,339 45%
  Camera Addict $1,318 45%

There's an urban legend that some retailers sell their products cheap and then try to make back some profit by pushing expensive service plans. In these charts, there are a handful of examples of that. But ironically, some of the most expensive service plans are bundled with some of the most expensive TVs. Conversely, some of the heaviest discounters also have the lowest-priced extended warranties.

In Table 3, for instance, Prestige Camera, Broadway Photo, and Camera Addict have the lowest TV prices and the highest extended warranty prices. However, in each case the bundle of the TV and its warranty is around $1,900. Some retailers charge that much for the TV alone. And six charge more for the bundle than any of these three.

At the other extreme, there are retailers such as Wal-Mart, Beach Audio, and Limited Goods that maintain low prices for both the TVs and the warranties. And two of the three retailers that charge less than 10% for the extended warranty are also price leaders for the bundle of the TV and its extended warranty.

In Table 4, the warranties are all four or five years in length. Some don't kick in until the manufacturer's warranty expires, but again they're not twice the price for twice the duration. While the average two- or three-year warranty is pegged at 17% of this $1,560 TV's pricetag, the average four- or five-year warranty is pegged at only 22%.

Table 4
Philips Model 50PFP5332D 50" Plasma TV
Product & Extended Warranty Price Comparisons
(for Four- and Five-Year Service Contracts)

  Retailer  TV Price in $  Extended Warranty
Price in %

  Wal-Mart $1,397 8%
  Limited Goods $1,490 9% $1,679 14%
  AV $1,700 15%
  Beach Audio $1,359 16% $1,477 16%
  Butterfly Photo $1,400 18%
  Best Buy $1,400 18% $1,525 18%
  Bright & Sleek $1,679 19% $1,770 19%
  123 Buy Direct $1,899 20%
  Plasma Bay $1,609 22%
  LCD TVs $1,599 23% $1,545 23%
  American Home & Office Technologies   $1,900 24%
  Best Price Audio Video $1,555 24%
  Focus Camera $1,549 26%
  Ace Photo & Digital $1,545 26%
  Circuit City $1,900 26%
  Twister Group $1,468 28%
  HiFi Trader $1,589 33%
  Mac Mall $1,430 34%
  CompSource $1,518 40%
  New Egg $1,600 41%

In Table 4, some of the highest unit prices are seen at Circuit City, 123 Buy Direct, and American Home & Office Technologies. And while their extended warranties are priced close to the average, the resulting bundles of the product and its protection plan are the most expensive on the chart. Circuit City, in fact, is the highest of all, with a $1,900 TV and a $500 extended warranty.

At the other extreme are two repeats from Table 3: Beach Audio and Wal-Mart, which have relatively low prices for both the product and the product protection plan. And Limited Goods wants $1,490 for the TV but only $131 for the extended warranty. But the fourth least expensive bundle comes from Best Buy, which charges only $250 for a four-year warranty on a $1,400 product. Butterfly Photo has the same prices as Best Buy, but its extended warranty stretches for five years.

Therefore, while there are some retailers who price the product low and the coverage high, there are others for which both prices are low, or both are high. There is no clear correlation between the two. And despite those who think those extended warranties are all alike, there continues to be at least as much range in those prices as there is for the products they insure.

The IWCM Launches a Best Paper Award for 2008

IWCMThe Institute of Warranty Chain Management (IWCM) is pleased to launch a contest to encourage the creation and documentation of ideas and best practices in the warranty industry. Authors are invited to submit papers on warranty-related subjects which encompass the whole warranty value chain.

Glen Griffiths, president of the Institute, said it's part of an effort to generate content, which in turn will be offered to members. "We want to encourage people to write papers about warranty," he said. Basically, there are numerous PowerPoint slide decks floating around, but not a whole lot of Word documents.

Papers must be written in English and should contain a minimum of 5,000 and a maximum of 10,000 words and must include an executive summary and/or abstract as part of the word count. Papers must be submitted to the IWCM via email to by 5pm PST on Wednesday, January 16, 2008. The winner of the competition will be informed via email by Thursday, January 31, 2008, and will be announced publicly at the WCM Conference.

Papers will be judged on relevance and comprehensiveness of subject content, originality and contribution to warranty thinking. The paper determined by the IWCM review committee as winning this competition, based on the above criteria, will be invited to present their paper at the Warranty Chain Management Conference in San Diego. The winner will qualify for a round trip coach class ticket to San Diego (up to $1,000), three nights hotel accommodation at the Hyatt Regency and entrance to the WCM Conference itself (total value of $2,900).

Subjects eligible for the award include, but are not restricted to:

  • Warranty Management,
  • Warranty Management Systems,
  • Managing the End-to-end Warranty Chain,
  • Warranty Policy,
  • Warranty Administration and Registration,
  • Warranty Tools and Techniques,
  • Early Warning Systems,
  • Warranty Service and Support Chain,
  • Warranty Logistics and Supply Chain,
  • Extended Warranties,
  • Warranty Benchmarking and Metrics,
  • Warranty Cost reduction,
  • Design for Warranty, and
  • Finance aspects of Warranty.

All decisions by the IWCM review committee on the winner of the competition are considered final. This prize is not transferable. A substitute cash prize of $750 will be available if the winner is unable to attend or present at the WCM conference.

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