SMS 187 – The Problem with Warranties

Warranties

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?

  1. 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
  2. Limited warranty (seen with everything) – generally cover nothing, usually just manufacturing defects which shouldn’t exist anyway, you think you’re getting something 
  3. 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) 
  4. Extended warranty – worst warranty, something you actually have to pay for
  5. Imposed warranties – Ontario New Home Warranty Program, administered by Tarion 

Buying extended warranties

  1. Warranty economics
    • If a consumer was always winning the warranty company would go out of business 
  2. Valuing the warranty instead of the product
  3. 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?

  1. You potentially buying something you can’t afford to replace or repair
  2. Something you hope to never use – Don’t buy things you can’t afford to replace – own things don’t let things own you
  3. Artificial sense of security
  4. When you buy a warranty you are just moving problems into other buckets
  5. 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

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