Introduction: A warranty is a legally binding commitment forming part of the sales contract which assures the buyer that the product or service is free from defects. A warranty often provides for a specific remedy such as repair or replacement in the event the article or service fails to meet the warranty.
– The difference between insurance and warranties
– Apple Care
– Why avoid warranties
– The concept of being self insured
– The pricing model for warranties
– How to reason you way out of a warranty with basic math skills
How are warranties marketed?
- Basic manufacturing warranty – Supposed to be company standing behind a product that a company believes in but in reality they are just protecting their brand
- Limited warranty (seen with everything) – generally cover nothing, usually just manufacturing defects which shouldn’t exist anyway, you think you’re getting something
- 30-day money back guarantee – this is the best warranty you can ever be offered (protects the seller/retailers and protects them against the buyer)
- Extended warranty – worst warranty, something you actually have to pay for
- Imposed warranties – Ontario New Home Warranty Program, administered by Tarion
Buying extended warranties
- Warranty economics
- If a consumer was always winning the warranty company would go out of business
- Valuing the warranty instead of the product
- Extended warranty statistics
- Warranties statistically cover the period of time with the least amount of risk or the most reliable time period of the product you’re buying
What do warranties actually represent?
- You potentially buying something you can’t afford to replace or repair
- Something you hope to never use – Don’t buy things you can’t afford to replace – own things don’t let things own you
- Artificial sense of security
- When you buy a warranty you are just moving problems into other buckets
- In the case of purchase extended warranty, prepaid repairs
If you bought a car and purchased the 3 year $2,800 extended warranty.
- If you needed $1,000 of repairs over the 3 years would the warranty have been a good idea? No you would be down $1,500.
- If you needed $2,800 of repairs over the 3 years would the warranty have been worth it? No you risked $2,500 over 3 years to save $300.
- If you needed $3,000 of repairs over the 3 years would the warranty have been worth it? No, you bough a car that need $3,000 worth of repairs that is a very bad car
Problem: Do warranties really fill this need or are they marketed as something else. Warranties move buckets of worry from what if this thing fails can I afford to fix it to I hope what ever goes wrong with this thing it is covered under the warranty which is really just the prepayment of future repairs.
Problem: The economics of warranties. If a warranty company sold 100 people a $1,500 warranty which covered a bumper to bumper defects for 2 years on their car the warranty company would have collected $150,000. If half of the car owners claimed $1,500 worth of repairs