Warranties are withering, claims an Arizona State marketing professor. This, he says, bodes well for service contract industry profits, but not for consumers.
But in many product sectors warranty is expanding and recent studies show that consumers believe that service contracts deliver value.
Prof. Rajiv Sinha, Ph.D. argues that “[a]dapting to market forces and to managerial concerns, the duration of warranties and the extent of coverage have been rapidly declining.” He says that because of “large increases in reliability as well as the level of commoditization in consumer electronics markets,” warranties no longer serve to signal product quality and that this trend is leading “many firms to switch their focus … to offering … extended warranties … which consumers must pay for themselves.”
Maybe Prof. Sinha is limiting his observations to the consumer electronics market. It’s not clear. If so, what products make up this market? He does not say. And as products become more reliable, and less expensive to repair or replace, why wouldn’t a company ratchet up coverage? Doing so would add little, if anything, to marginal cost, yet would yield all of the marketing and signally benefits traditionally associated with warranty.
His shrinkage argument certainly does not apply to all product types. For instance, just yesterday Asustor, a provider of network storage solutions, extended the warranty term across its product line from 2 to 3 years, and did so retroactively.
The auto industry is another example of expanding warranty coverage. Spurred on by increasing customer service expectations and the success of Hyundai’s 1999 introduction of its 100,000-mile powertrain warranty, automakers continue to aggressively compete by expanding the scope (e.g., normal maintenance) and duration of their warranty offerings. Tesla Motors’ recent introduction of a new 8-year, unlimited mileage warranty covering the drive unit and battery of its Model S is but the latest example. Tesla previously offered a 4-year/50,000 mile warranty.
Extended warranties find no favor with the professor. In his view, they “all but eliminate the firm’s commitment to free base warranties.”
Free? Isn’t warranty cost factored into pricing?
He says that service contracts are “extremely profitable” for the sellers because make “wary consumers share in the risk of product failure.” He laments that “financial benefits accrue principally to the [service contract] seller, [but] it is unclear what benefits [service contracts] could possibly provide to consumers.” He then goes on to name a couple of benefits.
First, he notes that recent research shows risk avoidance or mitigation to be a “very important factor in the decision process” for consumers considering whether to buy an extended warranty, so much so that “consumers’ perceptions of risk … are driving the decision process.” So the recent research confirms what has been long known, some risk-adverse consumers will pay a premium for peace of mind. (Prof. Sinha does not cite or link to the study or studies he apparently draws from. In fact, the post cites no supporting references, reports, data, etc.)
Second, he observes that buyers of “durable and utilitarian products (like refrigerators, which rarely fail)” buy service contracts “to avoid feelings of guilt and regret in case of product failure and the subsequent consequences of not having coverage.” He posits that this is more about the buyer protecting her psyche, than it is about protecting against product failure. I’m no marketing expert or psychologist, but this, too, seems to me consumer willingness to pay a premium for reduced risk and peace of mind. So consumers must view these things as adding value to their purchase.
And unlike the professor, I would not characterize a product that allows the buyer to manage risk and derive peace of mind as an economically irrational purchase.