Extended Warranties Boost Retail Profits

Michele Norris talks with Kim Klemen, deputy editorial director at Consumer Reports, about a study that found that extended warranties rarely benefit the consumer — and are a major cash cow for retailers.

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MICHELE NORRIS, host:

It's a common scenario at the check out counter. You're ready to buy an appliance of some sort, perhaps a DVD player or a washing machine and the sales clerk asks if you want to shell out a few more bucks for an extended warranty.

Come on now, you have to make a quick decision. No time for research or a litany of questions. The sales clerk is waiting and there's a long line of increasingly agitated customers behind you. So what do you do? We hope this next conversation will be of help.

Kim Klemen is the deputy editorial director at Consumer Reports. The magazine has published a study on extended warranties in this month's issue and she's here to tell us all about it. Kim, so what's the verdict? In general are extended warranties a good idea?

Ms. KIM KLEMEN (Consumer Reports): Extended warranties almost never make sense for consumers for three reasons. Number one, products don't breakdown as often as people think. Number two, when they do breakdown it's less expensive, very often, to just have the product fixed then to shell out money for the extended warranty. And number three, extended warranties typically have all kinds of loopholes. They're not the blanket of protection that people think.

NORRIS: Help up understand what we're talking about. How much do these warranties cost and what kind of products come with a choice of an extended warranty?

Ms. KLEMEN: Sales people are pushing extended warranties for all kinds of products, from room air conditioners to digital cameras to ranges and refrigerators and, of course, TVs. And the reasons that people are getting such a hard sell are that these things are cash cows for retailers. They can make more money selling you an extended warranty than they do on the products themselves.

NORRIS: So often do people actually agree to buy these warranties? Is it truly a profit stream for the retailer?

Ms. KLEMEN: It's absolutely a profit stream. Our research suggests that in the months of November and December alone - and this would be just for electronics and appliance - consumers are going to shell out $1.6 billion, that's with a B, on extended warranties. And it's almost all money down the drain.

NORRIS: Are there cases where it does make sense to purchase an extended warranty, on big ticket items like stoves and dishwashers or home exercise equipment?

Ms. KLEMEN: There are two exceptions to our just say no advice. One - with a rear projection microdisplay TV. We're finding repair rates that are three times what they are with other TVs, and usually when there is a repair it's the $400 bulb that's at issue. So in that case it might make sense to buy an extended warranty.

The other case is with Apple Computers, because phone tech support is only free for the first 90 days of ownership. And after that it's a $49 fee per call. So in that case, too, the extended warranty might make sense.

NORRIS: Should consumers - how much research should a consumer do before going and making a purchase?

Ms. KLEMEN: The best thing to do is buy a reliable brand. Consumer Reports has been tracking this kind of information - what breaks down and when and what brands people own and how much it costs to repair - for decades and decades. And there are brands that are more reliable than others.

So if you have in your head those brands that are reliable, you start out in a much better place than if you're just buying, you know, the item on sale. So that's the first thing to do. The second thing before you even head out of your house is figure out what credit cards you're going to use and whether they extend the manufacturer's warranty.

Third, if you're set on buying an extended warranty - even though you know you'll probably never use it - make sure you negotiate. There's so much profit involved in these extended warranties that you can almost always get a better deal or extended coverage than the initial deal you're offered.

NORRIS: You know, I'm imagining trying to have that conversation with the sales clerk. Like I'll buy a warranty but, you know, I don't want to pay $200 for it. They really have room to negotiate?

Ms. KLEMEN: You really do. No, absolutely.

NORRIS: I'm going to take your word for it.

Ms. KLEMEN: Well, the better word would be don't buy the warranty in the first place, Michele.

NORRIS: That's Kim Klemen, deputy editorial director at Consumer Reports.

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