Peace Of Mind Drives Buying Of Extended Warranties

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Buyers of electronics and home appliances have about 15 seconds to decide if they are going to get an extended warranty. Dan Ariely, author of Predictably Irrational: The Hidden Forces that Shape our Decisions, says consumers opt for the warranties because they are looking for peace of mind.

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

With the Christmas shopping season behind us, perhaps you're now in possession of a new super smart phone or a 50-inch plasma flat screen television, or maybe you're thinking of buying that titanium washer-dryer combo once the January sales kick in.

Well, if so, then there is something else that you may have bought or that you'll have to consider buying, an extended warranty. It's turned into a retail ritual. You buy some household appliance or piece of electronics after mulling it over for hours, if not days, and then you have about 15 seconds to consider buying what amounts to an insurance policy on it.

I asked Dan Ariely, who's a behavioral economist at Duke University and the MIT Media Lab, what's going on in those 15 seconds. He said it's all about regret.

Professor DAN ARIELY (Behavioral Economist, Duke University): Think, for example, when would you be more upset: If you missed your flight by two minutes or by two hours?

SIEGEL: Oh, I think missing by two minutes would be a lot more disturbing.

Prof. ARIELY: Why is that the case? Because you can see that things could have been different. Often our happiness is not determined by where we are, but where we could have been, or how easy for us to imagine we could have been somewhere else. And that's exactly what happens when you're there with your big plasma television and they ask you this question.

SIEGEL: Yeah.

Prof. ARIELY: And you say to yourself: How would I feel in six months if this thing breaks and I know that I could have bought the warranty? And because we want to prevent that feeling, we want to prevent the feeling of feeling this deep regret later on. We're willing to do something that is actually not that financially wise.

SIEGEL: But obviously there are limits here. I mean, if I just spent $1,000 on something and somebody says here's a warranty for another 500, I'm beginning to wonder about the wisdom of this purchase, generally. And it sounds like a bad deal. But somewhere down around $50, $70, it's starting to seem like a reasonable extra given how much I just parted with.

Prof. ARIELY: Right. So often we think about money not in absolute terms, but in relative terms. A standard example for this is that if you to buy a pen and you can get 50 percent discount on a pen if you walk four blocks down the road, often people would walk four blocks down so you can save $5 on a $10 pen. But if you bought something for $1,000 and somebody offered you this same $5 discount, now you're not going to walk five or four blocks down the road.

So often we think about money in terms of percentages. And this is why, for example, when you go to renovate your house it's very easy to add things like changing the windows and change the kitchen and so on. When you go to buy tomatoes, you really focus on a couple of sense difference in the stores.

SIEGEL: Since we're thinking in terms of the cost of the warranty relative to the expenditure we just made, if what I'm paying for is replacement of the object once it goes defective, then that relatively seems to make a lot of sense. But if I'm insuring for a service call that might be no more expensive than to come and look at my toaster, suddenly it doesn't make ay sense.

Prof. ARIELY: That's right. And it also depend on if they fix it...

SIEGEL: Yeah.

Prof. ARIELY: ...what can go wrong. You know, in the LCD display, will they replace the display in total if one of the pixels goes away? Or is it just something that if the transformer goes awry they will fix it?

But what we're really buying here is peace of mind. Part of the reason it's a 15 second discussion and not more deeper discussion is because if we had a deeper discussion, we would realize that often we don't get full peace of mind with this purchase. We just get a partial peace of mind. But we're happy to get it because we want to be at ease with this purchase. We want to know that we don't have to worry about it. And as a consequence, we often pay too much money.

SIEGEL: Dan Ariely, thank you very much for talking with us.

Professor ARIELY: My pleasure, as always.

SIEGEL: That's behavioral economist Dan Ariely, the author of "Predictably Irrational: The Hidden Forces that Shape Our Decisions."

And if it is peace of mind that we're buying in those warranties, then Fred Schaufeld is in the peace of mind business big time. Schaufeld is the chairman and founder of NEW Customer Service Companies. And if you bought a warranty on consumer electronics from Wal-Mart or Kmart or Target, then you bought from him.

He says his company writes $3 billion worth of warranties a year. On NEW's Web site, you can learn some phrases in the language of the warranty business: "Improve the ownership experience;" and my favorite, "Go beyond the break/fix model."

Mr. FRED SCHAUFELD (Chairman and Founder, NEW Customer Service Companies): That's the old world. You know, we've been sensitive for many years to exactly what the professor was talking about, so we expanded the coverage far beyond what the manufacturers can do. Manufacturers cover product for defects in materials and workmanship, which is very, very important.

But we've changed the product in a couple of ways. One, we've added - you have a lot of portable products and the products are very prone to falling down, being stepped on, all kinds of accidental damage, ending up in water and problems caused by dust or heat, humidity. Those are all additions to what you get from the basic manufactures' warranty.

And the way we cover it is often very, very different. The business for me really, really started when I sat through a lecture that was given by Tom Peters and a retailer who had given consumer a dollar back for milk that he argued with her about, and the consumer walked away with her dollar and said, I'll never be back in the store.

SIEGEL: Tom Peters is the author of "Excellence" some years ago, �In Search of Excellence.�

Mr. SCHAUFELD: "In Search of Excellence." And at that point, I realized that the consumer wanted - the retailer realized it and I did also, that the consumer wanted way more than the dollar back. They wanted a positive experience. They wanted to be happy. So what we did is we put in place a 24 hour, seven-day a week technical assistance for consumers that help them troubleshoot, and gives them the operational assistance that they need.

And we focused on providing things fast. When there's somebody that has to be crawling through your attic with a flashlight in one hand and a screwdriver in his teeth, and insulation falling all over the place to fix your home theater or your HVAC system, you want to know that the person is going to show up on time, that they're going to be polite, that they're going to clean their shoes, they're going to have the right skills and the right schematics and parts. And you want to be able to do it while you're sitting at your desk. That's a lot of the focus that we put on, which really can't be calculated in that straight break/fix cost.

SIEGEL: You employ?

Mr. SCHAUFELD: We employ approximately 6,000 people.

SIEGEL: Are they in the U.S. typically? Or are they in Bangalore answering telephones? Or where?

Mr. SCHAUFELD: No. The people who are answering the telephones for the U.S. are in the U.S. if they're English speaking. We do have Spanish speaking in the Dominican Republic.

And, by the way, that's something that's very meaningful to consumers in the U.S. because the context that a U.S. citizen has on the phone with a U.S. product owner is a big deal. There's a lot of shared experiences that you don't have with somebody from a foreign country, even though they might be technically competent with that particular product.

SIEGEL: As in I want this to work so I can see the Steelers game. That shouldn't mystify the person on the other end of the phone what you're talking about.

Mr. SCHAUFELD: That is a very, very good point. In addition to that, though, even the way addresses are written in India is very different than in the United States, so people take a while to make that adjustment.

SIEGEL: Why isn't the retailer warranting the stuff they sell?

Mr. SCHAUFELD: Well, this is our only focus. Their focus is merchandising their products. Our focus is providing world-class customer service after a consumer goes home with the product. There's a lot of subspecialties to do what we do to make people walk away from a telephone conversation, where they started off really unhappy, with a smile on their face. So there's a skill that a bunch of us have made it our life's work to perfect.

SIEGEL: Well, thanks for talking with us. I think that many people listening probably had no idea that they had just bought something from you, and now have discovered that they've done that sometime in the past couple of weeks.

Mr. SCHAUFELD: Well, thank you very much.

SIEGEL: That's Fred Schaufeld who's chairman and founder of NEW Customer Service Corporation.

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SIEGEL: You're listening to ALL THINGS CONSIDERED from NPR News.

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