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Twenty dollar bills going through a paper shredder (Jupiterimages/(c) Jupiterimages)
Twenty dollar bills going through a paper shredder (Jupiterimages/(c) Jupiterimages)

Warranties

Why would you need that extended warranty? Add to ...

When Roland Mohabir spotted the deal at The Source on a pack of rechargeable batteries, he couldn't turn it down: They were $10 - half price.

"I took them to cash and the guy asked, 'Would you like to buy our service plan with this?' " recounts Mr. Mohabir, a 32-year-old logistics supervisor in Brampton, Ont.

He says he looked at the employee and looked down at the batteries to make sure they were talking about the same product and said, "No thanks."

The employee pushed again, saying the $6 plan would allow Mr. Mohabir to return the batteries for a replacement if they malfunctioned.

Why would he need a warranty on something designed to eventually fail? Especially a warranty that cost 60 per cent of the price of the batteries? He said no again and left.

He has made dozens of tech purchases since then, many of which have come with a warranty pitch. "They'll always try to guilt you into getting it," he says.

Extended warranties sold by retailers were once exclusive to big-ticket electronics and appliances, but now they are being offered on all kinds of products, including breast pumps and digital photo frames. The Source, which declined comment, even offers $2.99 warranties on its camera cases to protect against zipper failure. Analysts and academics say many electronics retailers make the bulk of their profits not from low-margin merchandise, but from extended warranties, which have profit margins of about 50 to 60 per cent.

The model has proved to be so lucrative that some surprising retailers have entered the marketplace. Toys R Us offers a 15-month replacement plan (which starts at $2.99 for items priced up to $24.99) and a two- or three-year service plan (which starts at $24.99 for items priced up to $149.99) on many of its electronic products and baby items. These service and replacement plans are marketed as hassle-free protection, but it's likely the child will grow out of a given toy before the manufacturer's warranty expires. A Toys R Us representative was not available for comment.

Last week, Best Buy stores in the U.S. introduced the "Buy Back Program." A twist on the traditional extended warranty, the plan protects against obsolescence rather than mechanical failure: You buy a plan at the point of purchase that states Best Buy will buy it back from you (for a small portion of what you paid) when you choose to upgrade to a new product. A Best Buy Canada spokesperson says executives will evaluate its stateside success before rolling it out in Canada.

Jerry Lawless, an emeritus professor of statistics and actuarial science at the University of Waterloo, says retailers do careful calculations based on previous claims to figure out how to price extended warranties - potential repair and replacement costs are always well below the price of the warranty itself.

It's no wonder salespeople can be so persistent, especially in commission-based retail environments.

In late 2009, Robb Engen, 31, a business development manager in Lethbridge, Alta., went to a big-box furniture store to buy a new living room set. A 42-inch LG plasma TV caught his eye and the salesperson offered him a deal on it - $300 off. While hammering out the final details, the salesperson offered Mr. Engen an extended warranty on the TV for $300, which he politely declined.

Then the manager came in and spoke to him, explaining all the different ways the TV could fail and detailing how much each repair would cost without an extended warranty.

"It's almost like they're taking away the credibility of the brand itself to try to increase their own profit margins," Mr. Engen says. He was also irked the warranty was not mentioned until they were about to close the sale.

In his case, he was able to walk away, but the pitching didn't end on the store floor. When the warranty was about the expire, he started receiving phone calls from the retailer, giving him "one last chance" to buy the extended warranty. He also received a letter in the mail pressuring him to purchase it.

The experience has soured him on shopping at the store. "It definitely does make you feel a little more guarded," he says.

Doug Simpson, president of the Canadian Council of Better Business Bureaus, says a service plan, like any contract, needs to be examined.

Sometimes the manufacturer's warranty requires a consumer to ship an item off to a warehouse to be repaired. On the flipside, many extended warranties (sometimes just printed on receipts) are misplaced or discarded before service is needed on a product, he says.

In some cases, extended warranties replace, rather than supplement, manufacturers' warranties. That means if the manufacturer's warranty is for two years, you need to find out whether the retailer's service plan goes into effect right away or after two years.

Also, many credit cards offer customers extended warranties so long as the product is registered after purchase.

While consumers do their homework before they purchase life insurance or property insurance, few crunch the numbers before signing up for extended warranties.

"What people have no idea of is what's the likelihood of product failure," says David Soberman, a marketing professor at the Rotman School of Management at the University of Toronto.

In a 2009 study published in the Journal of Consumer Research, researchers from Rice University, Carnegie Mellon University and the University of Maryland, College Park found that consumers were more likely to buy warranties on products that brought them pleasure (entertainment gadgets) than more useful ones (appliances) that actually tended to have higher rates of failure.

Consumer Reports is a good place to research product failure, but Prof. Soberman points to another good indicator of how reliable your product will be and whether it's worthwhile to buy an extended warranty: the price of the warranty itself.

"If the warranty is low, it's a good sign of a quality product," he says, explaining that the retailer has calculated a low cost for repair and probability of product failure.

A low-priced warranty on a cheap item, however, might also just be a straight-up cash grab.

"People know that many things these days aren't worth repairing," he says. "You can't imagine a repair man working on a rechargeable battery."

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