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Was extended warranty worth it? You decide.
26 comments- IT TOPICS:Hardware, Mobile & Wireless, Personal Technology
'Tis the season for extended warranties, those little “dealer packs” that consumer electronics retailers sell to allay our fears – and fatten up their margins. Whenever a product plays on your fears you can bet that there’s a big profit in it. That’s good news for consumer electronics retailers, which make as little as 5% on products such as an iPod, but rake in 80% or more on the extended warranty that goes with it, according to researchers at NPD Group Inc.
But is that a bad thing for the consumer? Making a good profit is the American way, after all, but the arrangement needs to be win-win. What, really, does the consumer get out of the deal? The Circuit City Advantage Protection Plan promises to “Extend the thrill of ownership” by covering repairs outside of the warranty. Last week I put that claim to the test when my daughter’s portable DVD player failed.
Just over a year ago she bought a $129.99 Nexxtech 7-inch portable DVD player with her savings, and I kicked in $29.99 for what was described as a four-year extended warranty. During that time, I was told, Circuit City would repair the unit or replace it for free if it failed.
We had problems almost immediately. The first unit began skipping and Circuit City replaced it under the store’s 30-day return policy. The replacement unit worked fine at first, but gradually began to get more and more flaky. Last week we brought it in for repair under the terms of the extended warranty. Here’s what we learned:
Lesson 1: What you think you bought isn’t always what you get
As I spoke with a store representative it became clear that Circuit City’s definition of the terms of the “protection plan” was quite different than what I had thought. My understanding was that Circuit City would repair or replace the item should it fail for the duration of the extended warranty period. That is, it would be covered for the entire four years, regardless of the number of repairs needed.
Not true. As the customer service clerk explained things, in fact I had purchased a one-time replacement or refund contract that expired after four years or when I made a claim, whichever came first. That wasn’t exactly clear in the Cityadvantage Protection Plan terms and conditions currently on the company’s Web site. As for the service plan description that came with the original receipt, it states that “The Cityadvantage Protection Plan….starts on the date of purchase and extends for the life of the plan.” The unit was covered either way, but this important difference of interpretation had ramifications as we decided what to do next.
Circuit City does not repair portable DVD players, so my daughter had two choices: receive a replacement unit or a refund in the form of a “gift card” for the original purchase amount of $129.99. The new unit, however, would not come with a warranty at all, she was told. For that she would need to pay $29.99 for a new extended warranty. Given the performance of the two previous units, going with no warranty was a big gamble.
Lesson 2: Keep everything that came with the product or you’ll pay a price
Next we learned that it’s not enough to return the defective unit: One must bring in all of the various bits and pieces that came with it. Did we still have the original box and all cables? If not, deductibles would apply. For example, failure to produce the original "manual" - a stapled, 2 by 3-inch mini-booklet that looked like it had been photocopied - would result in a penalty of $12.03 off the value of a gift card. But if my daughter couldn’t produce everything and we chose a replacement unit, they could take the missing pieces out of the new box – assuming that they still had the same unit in stock (they did).
My daughter found all of the various accessories, but she was through with Nexxtech. The contract terms stated that she was entitled to “a full refund of the purchase price” so she opted to receive the $129.99 gift card.
(Of course, a gift card is not really a refund – it’s another name for a merchandise credit. My daughter was limited to spending her refund at Circuit City. For the retailer, however, a gift card costs less than a cash refund. If she chose a product with a very low profit margin – an iPod – the cost to the store would be about 95% of the value of the card. But if she chose a high-value item, such as accessories that may carry markups of 50% or more – the cost to Circuit City might be half of that.)
Lesson 3: Thanks to dropping prices, replacement units cost less and offer more
None of that mattered to my daughter, of course, so we went shopping for a replacement DVD player. Soon we discovered that the same player she had purchased a year ago for $129.99 now sold for $99.99 – a 23% drop in price. Newer units offered more features for less money.
The extended warranty, which I bought for 23% of the original purchase price, was covering a replacement unit that cost $30 less. Thanks to price deflation, the extended warranty actually cost about one third of the value of the replacement unit. I had paid $30 to shield myself from the risk that I would have to spend $99.99.
Lesson 4: Buying a unit with a better warranty doesn’t cost you anything
As we looked at the various brands we realized that warranties varied considerably. The Nexxtech carried a 90-day warranty, while Polaroid’s was good for one year, parts and labor included. Buying a Polaroid unit gave us an “extended warranty” at no extra charge, and one might presume that a manufacturer that backs its product with a warranty that’s four times as long as Nexxtech’s has more confidence in its product’s reliability.
It used to be that a product that failed to perform was thrown away and you never bought that vendor’s product again. Today, extended warranties turn potential product weaknesses and fear of failures into a profit center. The truth, of course, is that most electronics are highly reliable and those that do fail do so almost immediately. Those failures are covered by the store’s return policy or manufacturer’s warranty.
I reminded my daughter of that fact. In the end she got her replacement DVD player. Instead of buying the $99.99 Nexxtech unit and spending another $29.99 on an extended warranty, she decided that she could live with Polaroid’s longer, 12-month warranty. So she used the $30 she would have spent on the warranty and invested it into an upgraded model with a bigger screen. She was thrilled.
Sure, the new unit might fail. But I think we can both live with that risk.
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