January 26, 2017

Service Contract Pricing: Ranges:

After looking at household appliances that clean clothes, wash dishes, and store food, we round out the major categories with a look at the classic range: a combination of a stove and an oven used to cook food. What do their service contracts cost? Does it vary by brand or product price?

Besides a refrigerator, the kitchen stove is the other major appliance a modern home cannot do without. Natural gas stoves have been around since the 1880s, while electric ranges became common in the 1930s. And while we don't have a date for the first service contract sold for a stove, it likely came hot on the heels of the first refrigerator protection plan, sold in 1934.

As with all other electronics and appliance types, with stoves we've found that the longer the service contract runs, the more it will cost. In all the weekly reports we've done so far, the only time the averages got lower as the contract term grew longer was with washers and dryers, and only at the four-year mark. There's no such anomaly with stoves. The longer the service contract, the more it costs. And there's no difference between the major brands in terms of service contract pricing either.

This week's mystery shopping expedition began with a search for stoves and service contracts sold by 16 major retail chains: Abt Electronics Inc., Amazon.com Inc., Best Buy Co. Inc., BrandsMart USA, eBay Inc., hhgregg.com (Gregg Appliances Inc.), Home Depot Inc., Kmart (part of Sears Holdings Corp.), Lowe's Companies Inc., Menard Inc., Newegg Inc., PC Richard & Son, Buy.com Inc. doing business as Rakuten.com, Sears Holdings Corp., Staples Inc., and Toys R Us Inc.

Toys R Us sells ranges? Well, not exactly. But they do sell the infamous Hasbro Easy-Bake Ultimate Oven for $45, and they also sell a $7 Toy/Bike Protection Plan for that toy set. And while Staples is not known for the breadth of its kitchen appliance offerings either, it did indeed sell what it described as a "counter top range" carrying the Better Chef brand name. And it sold both two- and three-year service contracts for it.

If one takes a look at the Better Chef unit, it becomes quickly apparent that it is not in fact a range. We're not product designers, but the common definitions of stoves, ovens and ranges is as follows: the stove is the burners at the top where the kettles and pots go. The oven is the enclosed and heated cube where the pans and roasts go. The range is the unit containing both a stovetop and an oven. And that's what we shopped for.

But not everybody sells stoves, cookers, ovens, ranges, or whatever you call your household cooking appliance. Of the 30 major retailers where we've been shopping for product and protection plan pairs, we could not find price data for ranges and/or service contracts in 14 of them. At BJ's Wholesale, Conn's, Costco Wholesale, QVC, Sam's Club, and Walmart, ranges were for sale, but either prices were not listed, or service contracts were not available, or both. At Adorama Camera Inc., B&H Photo & Electronics Corp., Crutchfield Corp., GameStop Corp., Micro Center, Office Depot, Target, and Tiger Direct, ranges were not offered for sale at all.

Top Appliance Brands

At each retailer, we shopped for three brands of ranges: Frigidaire (made by Electrolux AB), GE Appliances (now owned by the Haier Group), and Whirlpool (made by Whirlpool Corp.). About two-thirds used electricity to cook, while about a third used natural gas. A handful of units could use both fuel sources.

Prices were for the unit only, with no additional charges included for shipping, delivery, installation, taxes, or removal of the old unit. At each retailer, we started with their least expensive Frigidaire, GE or Whirlpool range, and then we priced units in $200 increments, until we reached the top of their line. For most retailers, prices started at around $350 to $400, and topped out around $2,800 to $3,000. But it is easy to spend much more, especially with luxury brands besides the ones we shopped for.

We tried to stick to free-standing units with a cooking surface on top and a single enclosed oven within. But in a small number of cases, we had to include oven-only wall units and double-oven ranges to get data at specific price levels. However, we completely excluded both microwaves and toaster ovens, as well as any sort of multiple kitchen appliance bundles, so as not to unduly complicate the reliability/repair cost profile of the data. We wanted there to be no known dependability or reliability differences between the products at comparable price levels, so that this could be ruled out as a factor in service contract pricing.

In Figure 1, we've tallied up the number of units surveyed for each brand.

Figure 1
Brand of Range Surveyed

Figure 1

For each product, we noted the list price of the unit and the prices of all corresponding service contracts. Then we compared the two, calculating the percentage ratio between them. In total, we found 346 service contract offers for 359 ranges. While the products ranged in price from $353 for a compact Frigidaire unit all the way up to $3,600 for some high-end GE Profile units, their service contracts ranged in price from $40 to $472, with terms ranging from one to 10 years.

Service Contract Teams

For ranges, we found retailers to be working with one of five different third-party companies: Best Buy and Newegg worked with AIG Inc.; BrandsMart USA, hhgregg, and Menard's worked with AmTrust Financial Services Inc.; Lowe's worked with Assurant Solutions; Home Depot worked with Asurion; and Abt, eBay, Rakuten, Staples, and Toys R Us worked with SquareTrade Inc.

Usually, the same team of administrator, obligor, and underwriter was always working together. For instance, AIG's underwriter was always Illinois National Insurance Co., and AmTrust's was always Wesco Insurance Co. And they also owned the administrators they worked with. However, SquareTrade worked with both CNA and Starr Indemnity & Liability Co., depending on the client. Kmart, Sears, and PC Richard sold and managed their service contract in-house.

Also, Amazon.com splits its appliance service contract business among at least three companies: AmTrust, Assurant Solutions, and SquareTrade. Usually, the same administrator would offer a pair of service contracts for a given unit, perhaps for either three or four years. But at Amazon.com, we found AmTrust's Warrantech and Assurant Solutions sometimes sharing the same page with competing offers from SquareTrade.

Overall, we found that the average price of protection for ranges was 13.3%, which was significantly lower than we found for either dishwashers, clothes washers, refrigerators, or clothes dryers. We're not sure why. But it was definitely lower, as we will show in three different ways. Let's start with brand name.

After calculating percentage ratios for the 346 product-protection plan pairs, we organized them by manufacturer and calculated an average for each. Once again, as we found last week with refrigerators, there was little difference between the major brands in terms of the price of protection. Frigidaire and Whirlpool were slightly above average, while GE was slightly below average.

Figure 2
Price of Service Contracts Offered
Compared to Range Brand
(as a percentage of the product's price)

Figure 2

The reason for these small differences seems to have more to do with product mix than with any meaningful differences in reliability or repair cost. For instance, most of the high-end units were GE, and since the relative cost of protection is lower for high-end units, GE's average was also a bit lower. Frigidaire was the most numerous overall, because some retailers didn't stock GE or Whirlpool ranges. So its average was close to the overall average.

Suffice it to say that Figure 2 proves that the people pricing service contracts do not seem to take brand into account. Generally, they choose price bands, so that every unit with a list price within a given band has the same service contract price. So at least for the major brands that we shopped for, service contract prices seem to be brand-neutral.

Higher Costs for Cheaper Units?

There is, however, a very strong correlation between the price of the unit and the price of protection. On a percentage basis, the low end costs more to protect than the high end. A $500 range might cost $100 to protect (20%), while a $3,000 range might cost $300 (10%).

We found this to be true by taking all our ranges and dividing them up into three approximately equal groups. As can be seen in Figure 3, we had 118 whose list price was under $900, 124 whose list price was over $1,700, and 117 whose price was in between.

Figure 3
Price of Ranges Surveyed

Figure 3

Next we took an average for all the product-protection plan pairs within each group. Those results can be seen in Figure 4. And it's clear that while the midrange group was priced very close to the 13.3% overall average, the low end was significantly above it while the high end was significantly below it.

In fact, it was almost a straight line. On average, buyers looking at ranges priced between $350 and $900 were likely to pay twice as much on a relative basis for protection plans as those looking at units priced between $1,700 and $3,600. As Figure 4 illustrates, the first group paid an average of 18%, while the latter group paid only 9% on average.

Figure 4
Price of Service Contracts Offered
Compared to Range Price
(as a percentage of the product's price)

Figure 4

More than anything, this is a reflection of the realities of repair and replacement costs. If the loss cost for a $1,000 range is $130, that doesn't mean the loss cost for a $500 unit will be $65. And it doesn't mean the loss cost for a $3,000 unit will be $390. Instead, the average cost of claims is largely independent of the price of the unit.

In fact, what we found was that many retailers seem to have both a minimum and maximum service contract price for ranges. For Abt Electronics, hhgregg, Kmart, Menard's, Home Depot, and Best Buy, the minimum seemed to be around $80. In other words, for many retailers, the lowest-priced protection plans were $80, no matter what the unit price. Anything lower priced would probably be unprofitable, given the likelihood and average cost of claims.

At the other extreme, one would assume the high-end units are better-built and less likely to fail. But that might mean more expensive parts, more complex repairs, longer house calls, and higher repair costs per incident.

Still, we found something of a ceiling for service contract prices to be in effect. For instance, at Best Buy, BrandsMart USA, hhgregg, Kmart, and PC Richard, the price of protection plans seemed to top out at around $300, though other retailers priced their plans as high as $472.

What we're saying is that the pattern in the data suggests that the average loss cost per range is probably somewhere between $80 and $300, no matter what the selling price of the unit is. It would be unprofitable to price service contracts below $80, and anything over $300 might be excessively profitable, given the frequency and severity of claims.

The Time Factor

The biggest factor affecting the price of these service contracts, however, was the length of time they would be in effect. Most of the product warranties cover the first year of ownership, so it's no surprise we found so few one-year service contracts for sale. As Figure 5 shows, three- and five-year service contracts were the most popular offerings, accounting for more than three-quarters of the total.

Figure 5
Length of Service Contracts Offered

Figure 5

Retailers that offered their customers a choice of three- or five-year service contracts included Best Buy, BrandsMart USA, hhgregg, Home Depot, Kmart, Lowe's, PC Richard, and Sears. In addition to the comprehensive three- and five-year service contracts, hhgregg also offered discount five-year service contracts that covered only the burners and heating elements of the ranges. And in addition to three- and five-year options, PC Richard also offered its customers two- and 10-year terms. Meanwhile, Newegg was the only retailer offering one-year plans.

One would expect that for products such as ranges, the longer the coverage, the higher the cost. So it's to be entirely expected that the 10-year plans are the most expensive, and the one-year plans are the least expensive. What's surprising is the degree to which this is true for ranges.

With other appliance types, there was a more gradual slope to the increasing cost chart. For instance, the average price of service contracts for both refrigerators and washer/dryers ranged from 11% for the shortest plans to 24% for the longest plans. But as can be seen here in Figure 6, the span for ranges is 4% to 30%.

Figure 6
Price of Service Contracts Offered
Compared to Length of Coverage
(as a percentage of the product's price)

Figure 6

Keep in mind, of course, that we priced only six one-year plans and only ten 10-year plans. And both of those came from a single retailer each. But there is nothing linear about this chart. If there was, four-year plans would cost twice as much as four-year plans, and five-year plans would be 20%.

In addition, this is the fourth time we've found the four- and/or five-year plans to be less expensive than would be predicted merely by extrapolating from the two- and three- year prices. In other words, service contract pricing is not a straight-line exercise. While the cost in Figure 6 is close to 4% a year for one- to three-year service contracts, it's closer to 3% a year for four-to-ten-year plans.

This suggests to us that there's a fixed startup cost for any service contract sold, and then there's a variable cost based on its duration. So the price of those one-year plans, which add little to the cover already provided by the product warranties, are probably based mostly on startup costs. And the longest plans are based mostly on the cost of coverage, with the startup costs spread over multiple years.

Lots of Price Variability

The bottom line with service contracts for ranges, as with all service contracts, is that there is no single price. And there is lots of movement around the averages. For instance, we found one low-end Frigidaire unit for sale at five different retailers, at list prices that ranged from $719 to $899. The service contracts ranged from $40 to $240. For a high-end GE unit, the three-year plans ranged in price from $120 to $252, and the five-year plans ranged from $180 to $388.

Granted, there are important qualitative differences between plans, such as how and when a replacement unit will be offered, or whether there is a lifetime cap on repair cost. Indeed, some service contracts are deemed to be completed after a single big repair, and coverage may not always transfer to the replacement unit for the remainder of the term.

Anybody that says service contracts are never (or always) a good buy needs to consider the price of protection as well. At just one retailer, we found two-year plans priced at under 4% of list price, and 10-year plans priced at 40% or more. And in that case there was no difference in the coverage -- just the price and duration.

We don't want to say that these averages are the dividing line between bargains and swindles. They're just averages. But we do believe that while some service contracts are bargains, others are swindles. Retailers need to make money, but they shouldn't sell their products at a loss and then make it up through aggressive pitches for their overpriced protection plans. However, it's pretty clear that some of these service contracts are priced below cost, and their providers are losing money on them.

The point is that shoppers need to put in just as much effort researching the protection plans they might buy as they do for the products they intend to buy. The prices for both vary by so much that they have to be considered together. So the answer to the question of whether service contracts are never (or always) a good buy is simply, it depends.

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