Selling Extended Warranties Sends a Mixed Message

I know it is the Christmas season because I am bombarded with extended warranty offers on everything I buy.  One sales person in particular asked me if I wanted to buy an extended warranty on a television.

ME:  “What does the warranty cover?”

HIM:  “It covers the cost of repair or replacement if something goes wrong.”

ME:  “Like, if I drop it or something?”

HIM:  “No, it doesn’t cover that.”

ME:  “Oh, you mean if there’s a power surge and the electronics get fried?”

HIM:  “No, it doesn’t really cover that either.”

ME:  “Then, what does it cover?”

HIM:  “The warranty covers any repairs needed as a result of an internal failure.”

ME:  “Internal failure, meaning defective?”

HIM:  “Yes.”

ME: “So, there’s a good chance this TV is defective and I will be screwed unless I buy the warranty?”

HIM:  “Ummmm….”

ME:  “I’ll pass.”

The logic behind selling extended warranties is fundamentally flawed.  (Yes, I recognize warranties are sold because consumers buy them and the retailer makes money.)  Selling extended warranties sends mixed messages to consumers.  On one hand, retailers depend on their customers believing in the quality of products offered and the reputation of the organization to deliver that expected level of quality.  On the other hand, customers are asked to pay a hefty fee in anticipation that the seller will fail to live up to the standard of excellence it is trying to portray.  This is the reality, but does it even make sense?  Carefully consider the following before offering to sell your customer an extended warranty.

  1. Extended warranties contradict the consumer’s sensibilities about the meaning of “fit-for-use.”  As consumers, we expect the products and services we buy to be fit-for-use, meaning those products and services will function as intended in the normal environment of its use.  For example, we don’t expect our pet fish to survive an afternoon of playtime with our pet kitten.  We do expect our snow boots to keep our feet warm and dry in the snow.  We expect our kids to be kept safe at school or camp.  Extended warranties contradict the consumer’ core belief in the product or service– the same core belief that drove the consumer to purchase the product or service.   Put yourself in the shoes of the consumer for a moment.  When we are offered an extended warranty, there arises a brief contradiction to what we believe about the product (the product is fit for use) and what the seller implies about the product (the product is not fit for use).  Alternately, when the seller of a product offers us a free bumper-to-bumper extended warranty, our core belief about the product is reassured.
  2. Extended warranties presume a lack of quality.  Why do consumers buy extended warranties?  Because consumers assume the product or service will fail sometime within its useful life.  As consumers, the more we are asked to pay for an extended warranty relative to the initial product price, the more we become convinced the product might be defective.  If we were to buy a computer for $1,000 and shamelessly pressured to buy an extended warranty for $250, we could assume one of two scenarios exists.  First, there is a 25% chance the PC will fail.  (Why else would the warranty be 25% of the purchase price?)  Alternatively, we could assume that there is a much lower chance of failure, the seller knows it, and is just trying to make extraneous profit on the sale.  Either scenario creates distrust between the buyer and seller based on the presumption of the lack of quality in either the initial product or the subsequent customer relationship.
  3. Extended warranties reduce the incentive to build quality products.  Extended warranties are often backed by a third party (excluding most automotive and Apple warranties).  So, if the product is defective, it is NOT the manufacturer taking the financial risk for failures.  In fact, the manufacturer may never see its lack of quality.  The third-party backer will repair or replace the product from the funds collected from the 75% of consumers whose products do not fail.  The cost of the poor quality is not transparently passed back to the entity responsible for poor quality in the first place.  The extended warranty, in effect, insulates the guilty party from fully feeling the pain of inferior products.  The producer is numb to the “improve-or-die” incentive inherent in companies that stand behind the quality of its products.  [This reasoning should encourage consumers to give preference to products and services backed by the manufacturer directly.]

As a practical matter, there is a time and place for extended warranties.  It is always wise to weigh the risks and reward of such offers before any major purchase.  The philosophical dilemma is in the message extended warranties send.  As you think about your business model, consider every single message you send to your customers, whether expressed or implied.  We know that extended warranties generate revenue, but what do they say about our product or service?   What quality statement is made by a surgeon offering to sell you life insurance just prior to performing your surgery?   – Jason Kilgore

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