Cafe Jack: Thank You For Buying an Extended Warranty

Friday, January 11, 2008

Thank You For Buying an Extended Warranty

Have you ever wondered how a company, for example Dell, can make a profit selling you a pretty good desktop computer for $349?

The answer can be found in this Associated Press article from this year's Consumer Electronics Show.

Extended warranties were estimated to be a 15 billion dollar business in 2004, with a 50% profit margin, according to washingtonpost.com

This is of course why corporations are so keen to sell you an extended warranty. It would be very naive to think that Best Buy, Circuit City, Sears, etc., are looking out for your best interests - they instruct clerks to push these warranties because the profit margin is much better than on the item you are buying.

Anecdotal evidence doesn't help when evaluating the cost/benefits of extended warranties. The fact that you happened to have a computer that required a new screen, hard drive, mother board etc. is not a statistically significant sample - all it means is you either got a lemon or you bought some low quality device - and learned to do some more research the next time.

The best thing you can do is be a savvy consumer and understand the reliability of what it is you are buying, the cost of repairs, what you can repair yourself and what it would cost to pay someone to make a repair if the device fails.

You also have to factor in how long you expect to use a device considering your buying habits, the nature of the device and how that particular technology is evolving.

If you are considering buying an extended warranty, make sure you understand what the warranty does and does not cover - keeping in mind that most electronic components are very reliable, particularly if you consider the one year burn-in period covered by the manufacturer's warranty - meaning that failures are more likely to occur because you drop, run-over, step on or submerge a device in water and that damage is not typically covered by an extended warranty.

If you are a consumer who does adequate research before making a purchase and are willing to take the risk that an electrical or electronic device will not fail prematurely, or if it does that it will be covered under the manufacturer's warranty, then you should be thankful for the people who buy the extended warranty plans that help keep your purchase price low.

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