MENDOZA ASSAF
Jae C. Hong  /  AP file
Buying an expensive TV? You may want that extended warranty.
updated 11/23/2005 12:54:20 PM ET 2005-11-23T17:54:20

The last time you made a home electronics purchase, the chances are the clerk tried to sell you an extended service warranty. But are they really worth the extra cost?

In purely economic terms, the answer is nearly always no, experts say.

Extended warranties have become a big moneymaker for retailers in recent years, selling for well above their actual cost even as profit margins on products themselves are shrinking. The warranties are particularly appealing to retailers because they don’t need to keep anything extra in stock to sell a warranty. Once such warranties are sold, the cost of repairing or replacing a product is nearly always shouldered by the service plan administrators and insurance companies, rather than the store operator.

Some companies also pitch warranties on goods as they’re nearing the end of protection offered by the manufacturer, often contacting consumers by telephone.

But at the same time that businesses have expanded sales of warranties, most appliances and electronics have become steadily more reliable, said Claes Fornell, who directs the American Customer Satisfaction Index at the University of Michigan. Prices on everything from microwave ovens to CD players have also declined over time.

That sharply limits the odds that a consumer will need to repair or replace a product during the life of a warranty. If there is a problem after a few years, many products can either be repaired for little more than the price of a warranty or replaced at very low cost, said Mark Kotkin, associate director of survey research at Consumer Reports magazine.

“Our general rule of thumb is they (extended warranties) are not a good deal,” Kotkin said.

The possible exception, Kotkin and Fornell say, is protection on products that rely on newer, more expensive technology like flat-screen televisions. They often cost several thousand dollars, can be very expensive to repair, and since they’re relatively new, it is not yet clear how reliable they are.

Consumer Reports also suggests considering an extended warranty on treadmills and elliptical trainers — because they are particularly expensive to repair— and laptop computers, because some break easily.

Even in such instances, an extended warranty should never be more than 20 percent of the purchase price, Kotkin said.

Of course, retailers and the companies that back extended warranties know consumers are weighing the cost of the added protection against potential risk, said Jim Sebastian of SAFE LLC, a consultant to warranty providers. So most try to price warranties low enough that consumers, acting on impulse, see as worth the cost.

The idea is not so much to convince consumers that they’ll be saving lots of money, as to offer reassurance and a sense of protection, Sebastian said.

“The value is in the peace of mind that it gives you,” said Stephen Baker, a consumer electronics analyst for NPD Group, a market research firm. “If it gives them a sense of comfort, it’s not a bad thing. It’s just relatively expensive.”

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