Why Happy Shoppers Buy Extended Warranties | Hacker News Reader

Why Happy Shoppers Buy Extended Warranties

nytimes.com

20 pointsrobg19 comments

The extended warranty for my Mac payed itself in no time. 160 € on ebay (10 percent of the laptop price), and I already got two batteries, one keyboard, three disc drives, one logic board and one display replaced for free because of it.

Pretty much everything broke (except, and that really is funny, the hard drive). But I guess I’m not really the normal case or else Apple couldn’t be profitable. Well, I'm happy with my MBP, but I certainly wouldn’t be if I had no extended warranty.

And it’s heart wrecking horrors like my MBP repair story (that would be really stressful if you have no warranty and are relatively relaxing if you have one) that get people to buy those warranties.

They found that people were more likely to buy warranties on products that brought them pleasure — what they call hedonic purchases — than on ones that are merely useful

a positive mood makes people more risk-averse because they are afraid of losing that good feeling, which makes potential losses look greater

Gold, pure gold. The best I could come up with so far is to sell "personal customer support" for my apps. Didn't try it yet. Any other ideas?

I wonder if "The Warranty Psychology" is extendable to the freemium model? In many cases, a web app may involve a large commitment which isn't necessarily monetary.

One's web email program can involve a large commitment of time. A lot of people spend quite a lot of time answering emails. Many other web apps may involve such large commitments as well. Some forms of "premium" service can act to increase the user's feeling of security in their decision.

I too would love to hear other ideas about it!

I have only came up with one option "premium, personal tech support service plan". Given that I already give this level of service to all customers anyway, I might as well sell it as an add-on.

Maybe you, I and whoever else is into this should branch off into some place more permanent to brain-storm some ideas?

Do extended warranties actually ever pay out? I bought one, once, on a cell phone from best buy, and a year later when the phone broke, I went to best buy and they said they had sold off their phone warranty division or something and couldn't help me. But that maybe on their website I could find a number to call.

I had a totally different experience with Best Buy. I used to get extended warranties with my cell phones from Best Buy. I'd get a phone, and it would usually stop working sometime later. I'd just take it in with the warranty info, and I would get in store credit and buy another warranty with the new. It was really quite painless. I'd estimate that I ended up getting 2 or 3 phones worth around $80 new off of the extended warranties. And I remember the warranties being around $20-$30 bucks each. So it was worth it for me.

It's too bad that they sold the division. I doubt that I would buy another extended warranty for a cell phone if I couldn't get a new phone the same day.

Hey Smokey, I was searching through HN posts and I saw that you went to Iowa State. If you don't mind, can I ask you a few questions? Probably by email.

sure, wibge@gmail.com

I would expect the market for extended warranties to be competitive. At least as competitive as the market for the product the warranty is slapped on. How can stores make so much profits on warranties but so little on the associated products?

For a big-ticket purchase people tend to act more rationally and thus margins are lower but for extended warranty people tend to make snap decisions.

The effect is amplified by two factors:

1. When the product is hedonistic, anticipated pleasure undermines rational thinking, and anticipated loss of almost-real-already pleasure (brought up by the sales agent) leads to excessive risk aversion

2. Timing. To pony up a large sum of cash one has to go through some emotional upheaval, and the moment right after that is the moment where a person is likely still convincing himself how valuable the purchase is. Anyone who didn't convince themselves is not buying, thus all buyers are either indifferent (not enough money) or momentarily very attached to the product. Timing is very important here and commands 100% higher margins as demonstrated by the 2x different between in-store and after-market warranty costs.

Good in-store salespeople also master the art of looking slightly surprised and/or disappointed when you decline the extended warranty, the implication being "Oh dear, Sir cannot afford the extended warranty, Sir is not quite as magnificent as I estimated him to be."

The disappointment, however, is genuine as as the article points out the warranty is about 80% pure profit.

I agree with you although I wonder what happens in the case of repeated purchases. Wouldn't the store with lower prices and lower profits on these warranties attract more buyers? Or what if it's Christmas time and I'm buying a gift, I would consider the extended warranty much more rationally.

I suppose when people comparison-shop they compare on prices, not thinking about extended warranty yet. That part comes later.

You are also neglecting an important factor - someone who is that much into forethought and rational decision-making (such as yourself) so that he is comparing extended warranties before shopping is more likely to buy after-market insurance or better yet skip it altogether because it's pointless.

In fact, I would prefer to shop in stores with more expensive extended warranty because such stores can allow lower margins on the products themselves.

Like the lottery, extended warranties can be thought of as a tax on the mathematically-challenged.

Because odds are that the product won't break before the buyer stops using it.

You're forgetting a very important fact: most participants on HN have highly analytical personalities. The rest of the world really doesn't see the need to examine everything so deeply.

I think you overestimate the ability of the average person to understand the mathematics of risk.

You mean somebody actually buys the extended warranty!!!!!!

You could say the same thing about health insurance. I have paid more in premiums that I have made claims for (I think), but I still find the insurance valuable. For some monthly amount that I have already budgeted, I am protected against the cost of any health-related issue. Not worrying about this is worth "throwing money away" for -- it is about balancing risk. (Things that aren't risky, like savings accounts or health insurance, aren't necessarily the best use of money. You could have made more money investing in subprime mortgages. Of course, too much risk, and you lose everything.)

Warranties are like this; some people are happy paying $50 for unlimited iPod replacements for 2 years. Personally, I look at me breaking something as an opportunity to upgrade to the latest and greatest. But some people don't want to pay $300 for that opportunity.

The difference is that the maximum downside of not buying the warranty is the cost of the unit (actually the cost of the unit discounted by the regular warranty period ) the downside of not having medical insurance is that you die (at least in the land of the free / home of the brave)

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