Are Extended Warranties Worth It?

Here Comes The Pitch

If you buy anything more complicated than a candy bar at a big-box electronics store, you'll almost certainly get pitched to purchase an extended warranty. Many product manufacturers will hit you up for one, as well. That's because these plans have become big business for both groups.

For example, according to Joe Barkai, program director for Manufacturing Insights, an IDC market research firm, in 2004 Dell took in $1.36 billion in sales of extended warranties, and spent only $1.18 billion in servicing both standard and extended warranty claims--a profit of $180 million. Warranties have become more important to the company's bottom line, too: 24 percent of Dell's net income in the first quarter of 2003 came from extended warranty sales; in the fourth quarter of 2005, that had grown to 37 percent, Barkai says.

Warranty Week's Arnum says Gateway also is one of the more successful PC makers in the warranty business, taking in three dollars in sales of extended warranties for every dollar spent to handle all of its warranty claims. That's partly because not all customers take advantage of extended warranty services. Dell and Gateway declined to discuss their profit margins on extended warranties.

Though coverage plans are profitable for stores and vendors, those providers vary on how hard they push the warranty and what products they will cover.

Steve Gusa, director of Best Buy's service contract business group, says Best Buy's salespeople are supposed to offer an extended warranty on anything that might carry a manufacturer's warranty. That includes items costing $20 or less.

But in Wal-Mart stores, extended warranties are available only on TVs priced $300 or higher, or on computers. You can, however, add a warranty on products that cost as little as $50 on its Web site.

Best Buy says it doesn't give its salespeople any financial incentives to sell extended warranties. Tom Miller, a former Best Buy salesperson from Myrtle Beach, South Carolina, confirms that, but says his store managers would eavesdrop on his conversations with customers, "and if you didn't push [an extended warranty], you'd be spoken to." On my visit to a San Carlos, California, Best Buy, I didn't get the hard sell--but then, I was only looking, not buying. I asked about warranties on TVs, and the rep seemed knowledgeable and willing to help. He was up-front about the limitations of the coverage, telling me that the plan--like most--doesn't cover image burn-in for TVs. The store's plans also do not cover accidental damage (most warranties don't, and those that do cost more).

Former Staples employee Chris Hankes says Staples doesn't pay commissions, but if a sales team met a monthly goal--for example, a percentage of sales with an extended warranty attached--team members would receive a small bonus, on the order of 15 cents per hour, which Staples confirms. That wasn't enough to get Hankes to sell them, but the bonus motivated other reps. Pushing a warranty is a common theme in posts by salespeople at RetailWorker.com. Salespeople posting to the site's forums joke about code names for extended warranties--a good sale is a "hot dog," but a good sale with a warranty is a "chili dog with cheese."

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