October 13, 2016

Service Contract Pricing: Blu-ray Disc Players:

The price of the product varies tremendously among top retailers. And so does the price of the protection plans they pair with these units. Some plans are priced low because they don't start coverage until the manufacturer's warranty ends, and they don't cover accidental damage. But others vary for more mysterious reasons.

As we continue our online mystery shopping exercise, we expanded our scope to include more electronics retailers and service contract administrators, obligors, and underwriters involved in the product protection business.

The process began with a shopping expedition seeking Blu-ray disc players at 16 major retail chains: Abt Electronics Inc., Amazon.com Inc., Best Buy Co. Inc., B&H Photo & Electronics Corp., BrandsMart USA, Crutchfield Corp., hhgregg.com (Gregg Appliances Inc.), Micro Center (Micro Electronics Inc.), Newegg Inc., PC Richard & Son, QVC Inc., Buy.com Inc. dba Rakuten.com, Sam's Club, Sears Holdings Corp., Staples Inc., and Target Corp.

At each of these retail sites, we sought out Blu-ray disc players made by Samsung Electronics Co. Ltd.. Samsung was one of the first manufacturers to launch a line of Blu-ray players, and seems to have the best distribution among top electronics retailers. It's a shame the company has so deeply fallen into crisis with its smartphone defects and recalls. But for home electronics, they do seem to have product everywhere, at a wide range of prices.

But to further reduce the amount of variables involved in our shopping expedition, we looked for only the Samsung models launched in 2015 or 2016, skipping over models launched from 2011 to 2014. This eliminated both Costco and Walmart from the process, as well as a long list of older Samsung models still offered for sale on Rakuten.com and some other deep discount websites. In all cases, we shopped only for new products -- not open box, no box, used, or refurbished units.

Service Contract Administrators

Over the course of going through the offerings of 16 retailers, we came across eight different obligor/administrator/underwriter teams. We found Service Net and AIG at Best Buy and newegg.com; Warrantech, AMT Warranty and AmTrust Financial Services Inc. at BrandsMart USA and hhgregg; and Asurion and CNA Financial Corp. at Walmart. SquareTrade was in Abt Electronics, B&H Photo, Crutchfield, QVC, Rakuten.com, Sam's Club, Target, and Staples. Micro Center had The Warranty Group, and both PC Richard and Sears had their own in-house service contract operations. And depending upon the Blu-ray player we looked at, Amazon.com had a competitive mix of plans available from Assurant Solutions, Asurion/The Warranty Group, and SquareTrade.

In all, we found 133 Samsung Blu-ray players for sale at these 16 retailers. But of course, they weren't all different models. Eliminating minor differences in features or specifications, we estimate there were 13 distinct models, ranging from a low-end $63 Model BD-J5100 disc player to a $700 high-end Samsung home theater system that included a Blu-ray player.

Figure 1
Price of Blu-ray Disc Player Surveyed

Figure 1

Therefore, the price spread just within the Samsung product line was varied enough to allow us to collect a good cross-section of service contract offers, so we eliminated some data collected on a pair of low-end Sanyo and Ematic units. And that took Walmart out of the running. Costco had a limited number of Blu-ray units for sale, and was promoting its own two-year product warranties paired with a free two-year warranty extension available to users of its own Costco Anywhere Visa card. So we were unable to find any Samsung player/SquareTrade service contract pairings.

Amazingly, we also found a pair of Blu-ray players for which no service contracts were offered. One was a $70 unit at Target, and the other was a $120 unit at Best Buy. Whether they were protection-less by mistake or on purpose, we could not tell. But that dropped our number of player/protection plan pairings from 133 to 131.

Pricing Data Collected

For each player/protection plan pairing, we collected the model number, the retail price (not including shipping, set-up, or sales tax), the price of the service contract, and the term. Because SquareTrade seems to be the only major player offering service contracts that don't begin until the product warranty ends, we did not collect data on that aspect of the protection plans. And because we limited our scope to 13 Samsung models that all featured one-year warranties (and because Costco wasn't in the mix), we didn't need to collect any data on the term of the product warranty.

Of the 131 service contracts, almost half had a term of three years. Only four were for five years, and only three were for one year, so we collapsed those into the batches for two and four years, respectively. That left us with three stacks:

Figure 2
Length of Service Contracts Offered

Figure 2

If we were to describe the typical, average product/protection plan pairing for Samsung Blu-ray disc players, it would be a $170 unit offered with a three-year service contract priced at $30. But, as the next three charts illustrate, there is a tremendous amount of variation around that central point.

In Figures 3 through 5, what we did was take the price of the service contract and divide it by the price of the Blu-ray player, resulting in a percentage. In some cases, the retailer offered both two- and four-year plans on the same model, or separate plans that included or excluded accidental damage coverage. We treated each combination as a separate pair.

SquareTrade Not Always Low-Cost

As with last week's television shopping exercise, we found a lot of SquareTrade pairings at the lower end in terms of both price and percentage. But those little blue squares weren't all in the lower left corner of each chart. In fact, one of the most expensive service contracts was offered by SquareTrade through its partnership with QVC: $140 for three years of coverage on a $550 home theater system.

Likewise, while Sears was offering service contracts above the average price, they weren't the most expensive of all, as was the case with televisions. In fact, we found six player/protection pairs at Sears, and all six carried service contract prices that were exactly 20% of the product price. The product prices ranged from $63 to $328. And the service contracts ranged from $12.60 to $65.60 -- not a penny more or less than 20%.

In Figure 3, we've noted all the SquareTrade offers as blue squares and all the Sears offers as red triangles. Here, all the Sears offers are on the 20% line and most of the SquareTrade offers are close to the 10% line. But the service contracts with the lowest prices compared to the price of the product they're covering are a pair of Asurion/The Warranty Group protection plans offered on midrange Samsung units listed by Amazon.com. They asked for $10 to cover units priced at $179 and $190, respectively.

Figure 3
One- and Two-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of Blu-ray price)

Figure 3

In terms of dollars, the lowest-priced protection plans were indeed offered by SquareTrade partners. Staples wanted $4.99; Amazon.com wanted $5.98; and B&H Photo wanted $6.99 for protection plans paired with low-end units priced between $63 and $80. None of these short-term low-end plans included any sort of accidental damage coverage.

Overall, the average price of the 49 shortest service contracts was about 15% of the price of the Blu-ray player they protected. The average price of the 63 three-year plans was 20%, and the average price of the 19 longest-lasting service contracts was 21% of the price of the product they covered. Among all 131 pairings, the average price was 18%.

With and Without Accidental Damage

One reason that the three-year plans were the most numerous was the pattern we found at SquareTrade, which offered plans for both midrange and high-end units either with or without protection against accidental damage. At Abt Electronics, for instance, the protection plans for a $178 unit were priced at $35 with, and $25 without accidental damage protection. Rakuten.com also kept the price differential between the two types of plans at $10. But at QVC, the price difference between the plans with and without accidental damage protection were either $15 or $20.

The net effect, however, was to multiply the number of SquareTrade pairings, making it seem like they control the market. They don't. But in Figure 4, they do outnumber the competition by about 3-to-1. However, notice that not all those pairings are crowded into the lower left corner. In fact, as we mentioned, the square to the extreme right was a QVC/SquareTrade offer, as were several pairings between 30% and 40%.

Figure 4
Three-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of Blu-ray price)

Figure 4

Despite the seeming popularity of three-year plans, we did not find any such offers at Best Buy, Sam's Club, Sears, or Target. That's not to say they don't exist. But there were no three-year protection plan pairings offered for the dozen or so Samsung Blu-ray models we shopped for.

However, both Best Buy and Sam's Club were among the retailers and administrators willing to offer protection plans with even longer durations of either four or five years. In fact, Sam's Club offered only five years of coverage (assuming that members took advantage of the retailer's buy four, get the fifth year free offer). Best Buy offered two- and four-year plans, usually with a $10 price differential between them.

But in terms of numbers, the longest-lasting service contracts were in relatively short supply. Of the 131 product/protection plan pairings, only 11% were for four years and only 3% were for five years. And again, SquareTrade (blue squares) dominated the landscape.

Figure 5
Four- and Five-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of Blu-ray price)

Figure 5

There were, however, a few quirks in the data. Online-only shopping sites such as Amazon.com and Rakuten.com also offer merchandise on behalf of other retailers. And some of those products also include service contract offers. And sometimes both the product prices and service contract prices are different, even for the same pairings.

For instance, Assurant Solutions covered a pair of offers on Amazon.com for the same unit, a Samsung UBD-K8500 Blu-ray player. One merchant wanted $318 which the other wanted $499. Assurant's service contract for the first was priced at $41, and for the second at $55.

Over at Rakuten.com, the same unit was offered by one merchant for $299 and by another at $318. But the service contracts, both from SquareTrade, were $50 and $56, respectively.

Along with the 20% pattern seen at Sears, we take this as evidence that something besides expected loss cost is driving service contract pricing. For instance, looking at just the Samsung UBD-K8500 Blu-ray player, the service contract offers ranged from 6% to 25% of the product price. And the product price ranged from $299 to $499.

No Correlation Between Prices?

There was little correlation between the two prices. For instance, Micro Center had a below-average product price and an above-average three-year protection plan price. But its two-year plan was priced below average. Amazon.com had an above-average price on the player, but Assurant Solutions had a below-average price on the protection plan. Sears was right in the middle of the range in both respects: $318 product and $63.60 protection plan.

Furthermore, there did not seem to be a strong correlation between the contract price and either the likelihood or the cost of a repair or replacement. It would never pay to repair a $70 unit. Yet the protection plans for those 38 different under-$100 units were priced anywhere from $5 to $40.

At the high end, the service contracts paired with those over-$300 units range in price from $20 to $140. And it's not all SquareTrade at the low end of that spectrum. AIG, The Warranty Group, PC Richard, and Assurant Solutions also have some low-priced offerings. And then some are priced at 25% or even 30% of the product price.

In other words, maybe the price isn't designed to cover the risk? Sometimes the contracts are overpriced, and sometimes they're underpriced. Maybe sometimes they're designed to lose money in order to gain market share? But consumers never know which it is, unless they comparison shop for the service contract as diligently as they do for the product price. And even then, they can be misled by the bells and whistles in the terms and conditions.

This leads us to an initial conclusion: the prices for service contracts seem to vary by as much as the prices of the products they cover, even when the durations of the service contracts are identical. Therefore, it pays to shop around and compare not only the specs and prices of the products, but also the protection plans that they're paired with.

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