February 2, 2017

Service Contract Pricing: Microwaves:

Built like electronics but sold like an appliance, the microwave oven is a hybrid of two different product categories. And with service contracts costing almost 19% of the product's price on average, it also has one of the highest average costs of protection. And there's a big difference in the cost of protection plans for units priced at the high or the low end of the market.

Microwave ovens are high tech electronics items for the kitchen. Invented by combat radar engineers shortly after World War II, these new cooking appliances first became practical in the mid-1950s, small enough to fit on a kitchen counter top in the mid-1960s, and then affordable enough for most households to purchase in the mid-1980s.

Of all the electronics and appliance product types we've surveyed since October, it turns out that service contracts for microwaves are the second most expensive on average, after laptop computers. But we think that's got more to do with their low list prices than their high claims cost.

Functional units sell for as little as $60. And since all they're doing is heating food by bathing it in microwave radiation, there's little to differentiate them at the low end besides their size and power. But we skipped over those metrics, looking only at the price of the product and comparing it to the price of protection. Like most buyers, we assumed that one $500 unit was as good as another.

This week's mystery shopping expedition began with a search for microwave ovens and service contracts sold by 18 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, Sam's West Inc. (doing business as Sam's Club), Sears Holdings Corp., Staples Inc., Target Corp., and Wal-Mart Stores Inc.

But not everybody sells microwave ovens. Of the 30 retailers where we shopped for consumer electronics items and service contracts last year, we could not find price data for microwaves and/or service contracts in 12 of them. At BJ's Wholesale, Conn's, Costco, Office Depot, QVC, and Tiger Direct, microwaves were for sale, but non-members could not see the prices of either the products or their service contracts. At Adorama Camera Inc., B&H Photo & Electronics Corp., Crutchfield Corp., GameStop Corp., Micro Center, and Toys R Us Inc., microwave ovens were not offered for sale.

Top Appliance Brands

At each retailer, we shopped for three brands of microwave ovens: Frigidaire (made by Electrolux AB), GE Appliances (now owned by the Haier Group), and Whirlpool (made by Whirlpool Corp.). However, none of these brands were offered at either Sam's Club or Staples, so at those locations and a handful of others, we substituted other brands such as Danby and Sharp.

In Figure 1, we've tallied up the number of units surveyed for each brand. For each retailer, we first looked for the most expensive microwave they had for sale, and then stepped down in increments of roughly $100 to their lowest-priced unit. We recorded the brand, the model number, the product price, and also the price and duration of the service contracts offered alongside those products. Then we compared the two prices and calculated a percentage ratio for each pair.

Figure 1
Brand of Microwave Oven Surveyed

Figure 1

There are several reasons GE dominated this data set. Some retailers such as Walmart sold little else but GE appliances. Others such as Best Buy and Home Depot had many more GE models than either Frigidaire or Whirlpool. So even through essentially random selection, GE units were more likely to be selected. However, Target had Frigidaire only, and both Menard's and PC Richard didn't have any GE microwaves either. Meanwhile, Sears and Kmart had very few Whirlpool microwaves on the shelves.

Service Contract Teams

For this product category, 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 and Walmart worked with Asurion LLC; and Abt, eBay, Office Depot, Rakuten, Staples, Target, 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 that worked with their retail clients. However, Asurion worked with either CNA or The Warranty Group as underwriters, depending on the client, and SquareTrade worked with both CNA and Starr Indemnity & Liability Co., depending on the client. Sears, Kmart, and PC Richard self-administered and self-insured their service contract programs.

Also, Amazon.com splits its microwave service contract business among at least four companies: AmTrust, Assurant Solutions, Asurion, and SquareTrade. Usually, with most other retailers, the same administrator would offer two or three service contract options for a given product. But at Amazon.com, we found AmTrust's Warrantech and Assurant Solutions sometimes sharing the same page with competing offers from Asurion or SquareTrade.

In the case of microwaves, the average price of the service contracts that we found for sale was just under 19% of the product's price, but as we will show, there are numerous ways to slice and dice that one single metric. Without looking at any at the features of the products themselves (counter-top, wall unit, over range, etc.) we found several trends in service contract pricing strategies. First, the duration of a service contract has the greatest effect on its price, followed by the price of the product it protects.

Brand name does not seem to have much of a bearing on anything, at least among the well-known brands we surveyed. If there are any meaningful differences between the quality, reliability, or loss costs of the brands, they weren't expressed in the corresponding prices of the service contracts.

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

Figure 2

As we said, the average ratio between the prices of all 302 product-protection pairs was just under 19%. As can be seen in Figure 2, Frigidaire and Whirlpool were a bit above this mark, while GE was somewhat below it. But that's because many of the GE units surveyed were relatively high-priced, not because they were somehow better. And as we will show in Figure 4, the price ratio between the product and the protection plan is linked to the price of the product.

Costs Less Than Other Appliances

Microwaves are different from most other kitchen appliance categories in several ways. Most obviously, they're priced lower than ranges, refrigerators, or dishwashers. While some of the high-end GE convection microwaves commanded prices over $2,000, most units cost only a few hundred dollars. So with this data set, we had to move the price boundaries much lower, and even making the cuts at $250 and $500 we didn't end up with three equal portions.

After our data collection was completed, we found we had priced 127 microwaves selling at list prices of $250 or less, and only 82 selling for $500 or more. And then there were 104 in between those price boundaries. In last week's newsletter, we found ranges to be significantly higher-priced than microwaves, so that less than a third were priced below even $900.

Figure 3
Price of Microwave Oven Surveyed

Figure 3

As with all other product surveys, microwave prices did not include taxes, shipping, installation, delivery charges, or any charges for removal of the old unit. But that's an obvious difference between microwaves and conventional ovens: at least for counter-top models, installations mean just opening the box, and the old unit is simply tossed into the trash. There's no refrigerant to be recovered, and no natural gas line to be disconnected. Still, there are wall units and other microwave models that do indeed require professional installations, and if service is ever required, a removal and then a re-installation.

We should also note that some retailers sell units that combine a convection oven with a microwave oven, or they have dual-chamber wall units that include one conventional oven compartment above or below one microwave oven. We tried to avoid including these models, so as not to complicate the claims cost projections by mixing technologies. In other words, we didn't want there to me meaningful actuarial differences between any two $1,000 units because of differences in quality, features, potential causes of failure, or cost of repairs.

But another obvious difference between conventional ranges and microwaves is in the size and weight of the unit. This has very important effects on both the product warranties and service contracts for each. First, while nobody expects the customer to bring back a refrigerator or oven for repairs, most counter-top microwaves can easily be shipped or carried back to either the manufacturer or a retailer. So in-home service is not always a requirement with microwaves, and service contracts can reflect that in their price.

Two Tiers of Service Contracts

Second, we found that some retailers offered two tiers of service contracts. For the high end and midrange of their microwave product lines, they offered repairs and sometimes in-home service calls. But for the low end, they offered replacements only. And then some retailers offered two tiers of repair plans: full coverage at full price, or discount plans that offered coverage of only the magnetron tube (which generates the radiation that heat the food).

However, even with these two tiers of protection, we once again found that the cost of service contracts for the least expensive units was proportionally higher than for the most expensive units. In Figure 4 we can see that the cost of protection averaged 23% for units priced under $250, and only 13% for units priced over $500. The midrange, meanwhile, was close to the overall average of 19%.

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

Figure 4

Moreover, while all retailers priced their service contracts based on the bands the product fell into ($0-to-$250, $250-to-$400, $400-to-$550, etc.), some set the lower-most band to be fairly wide. For instance, all the four-year contracts for microwaves priced under $1,000 at Abt Electronics were $80. All the five-year contracts were $100. It wasn't until we got to a $1,200 unit that service contract prices rose.

This suggests that there's a floor on the price of the service contract, based on the cost of repair. In other words, while the service contract for a $900 unit might cost $100, the service contract for a $200 unit would also cost $100. And that would show up in the percentage ratios, as it does in Figure 4.

And then there's also something of a ceiling on microwave service contract prices. Best Buy topped out at $250. Kmart and Sears topped out at $200. PC Richard topped out at $150. In other words, no matter how high the price of the product, there was a limit to how much the protection plan would cost. And that helped drive the average price of protection for the high-end units down to 13%.

Length of Coverage

The closest correlation between the price of the product and the price of protection was with the length of time the service contract would be in effect. One-year terms basically overlapped the product warranty's duration, and so they commanded the lowest prices. Longer terms cost more money, with some exceptions.

In total, while we found pricing information for 313 microwaves, we could not find the price of service contracts offered for 11 of them. So we were left with only 302 product-protection pairs. In Figure 5, we've grouped all the product-protection pairs by the number of years the contracts would cover the microwave oven.

There were only a relative handful of one- and 10-year offers. Three-year plans were by far the most numerous. And since pairings of three- and five-year offers were common too, the five-year plans were the second most numerous. But two- and four-year plan pairings were common as well, though Target offered only two-year plans. And eBay offered only three-year plans.

Figure 5
Length of Service Contracts Offered

Figure 5

We should note that many of the one-year plans were replacement-only, and half of the 10-year plans covered only the magnetron. This in turn depressed the average prices somewhat for those categories. But as can be seen in Figure 6, not by much. The one-year contracts were only a single percentage point less expensive than the three-year plans. And the average price of the 10-year plans was as exorbitant as ever.

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

Figure 6

Note the dip in the average price from two to three years. The same thing happened with washers and dryers, as we detailed in the January 12 newsletter. Back then, we blamed it on Abt Electronics and SquareTrade, which were offering lots of inexpensive four-year plans on high-priced washers and dryers, which pulled down the overall average below the level it would otherwise have been. This time, the anomaly has probably got more to do with the relatively larger size of the three-year data set compared to the two-year data set, and maybe a bit to do with the price-cutting strategies of the retailers that offer two- and four-year contracts vs. three- and five-year contracts.

And then there's PC Richard, which offered service contract terms of one, two, three, five, or 10 years on several units. By far, that was the largest number of protection plan choices per product. And in at least one case (a $144 Frigidaire unit with a 10-year service contract priced at $150), the price of protection actually exceeded the price of the product. Our counterproposal is to instead buy two microwaves, put one into storage, and throw the first one out after 10 years of usage -- it's $6.00 cheaper!

Same Models, Different Prices

All joking aside, this illustrates a point we've been making repeatedly throughout this months-long survey of electronics and appliance service contract prices: it pays to research not only the price of the products, but also the price of the protection plans. There is a massive range of prices for both.

At one end of the market, four retailers selling one particular Frigidaire model priced it close to $75. But the service contracts ranged all the way from $10 to $40. In the midrange of the market, a GE counter-top unit varied in price from $277 to $401 at three retailers. And its service contracts ranged from $28 for three years to $84 for four years. At the high end, a GE Profile unit was priced from $1,200 to $1,500 at five different retailers. But the three-year protection plans ranged from $100 to $210, and it turned out that SquareTrade was the highest-priced among them.

In other words, pick your brand, pick your model, comparison shop on price, but also figure in the cost of a product protection plan. Some cost twice as much as others. And while there are some platinum-level plans that deserve the higher price because their terms and conditions are superior too, others are just looking to gouge the unsuspecting consumers who haven't completed their homework.

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