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Unwarranted
Many consumers heed that advice. Ivan Strasfeld, a 56-year-old government lawyer, recently bought a high-priced refrigerator at Foremost Appliances in Washington and he held firm against buying an extended warranty, despite the hard sell. He said he would never buy such a service plan unless he knew that the product he it protected was guaranteed to break.
"If all these stores are pushing them so hard, it means they're only making a lot of money off them and repairing very little," he said.
 (By Steve McCracken for The Washington Post) |
By the industry's own calculations, Strasfeld is right. Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties as their cut.
Of the remaining $7.5 billion, the publication estimated that $3 billion was paid in claims by the insurance companies that back the plans. On the other hand, according to the Insurance Information Institute in 2004, the U.S. auto insurance industry paid out $66 in claims for every $100 in premiums.
Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales. But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.
Those profits are made possible by third-party providers such as N.E.W. Customer Service Cos., a Dulles private company that has grown 35 percent annually in recent years to become the largest independent extended service provider. This summer, it was sold to a private investor group for $1.2 billion.
N.E.W.'s chairman and founder, Fred Schaufeld, acknowledges that his industry has a history of being unfriendly to consumers. He said, however, that one of the reasons for N.E.W.'s success is the way the company has been "revolutionizing" the business by providing real service and value to customers -- a kind of "product care" service rather than an insurance product -- such that extended warranties become a loyalty-enhancing tool for retailers.
And after gaining huge amounts of business managing extended-service plans for dozens of retailers and other consumer goods sellers, he is not done yet.
"I can see a day when you'd buy an extended service plan for your expensive Italian shoes," Schaufeld said in a recent interview.
Sales Insurance
For a wide variety of consumer goods makers, from Ford Motor Co. to Dell Inc., extended warranty revenue has become as important a part of business as the cars or computers themselves. And several major appliance makers in recent years have scaled back their standard manufacturer's warranty to one year, leaving an opening for third parties to capitalize by offering extended warranties.
That trend troubles Six Sigma Consultants' Brue. The heavy reliance on extended warranties as a significant source of short-term profit can have the perverse effect of rewarding quality lapses, he said. Plus, Brue thinks such warranties are bad for consumers.
"It's a legal way of stealing from people," he said. "Good companies will fix their products."
