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Friday, 22 February 2013

Extended Service Plans | More Than Extended Warranty

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Originally published in Twice Magazine

Consumer Advocates Misinformed On Extended Warranty and Extended Service Plans

Christmas is coming, and I'm sure that once again a leading consumer advocacy magazine or television news show will take another shot at the extended warranty and extended service plans business.  As someone who has spent more than 20 years training retailers on how to successfully sell extended service plans (ESPs), I'm always amazed that these outlets consistently display their prejudice and lack of knowledge toward the service contract industry as a whole.


Extended Warranty or Extended Service Plan?:

Admittedly, I am biased, but I think if they took the time to understand the entire business, it may affect their coverage. Many of the retailers that have been cited over the years don't even sell an extended warranty. What they do sell are extended service plans, performance service plans, service contracts or similar types of programs. These plans typically cover many more service and repair issues than an extended warranty. Apparently, critics are not aware of the difference.

It is correct that an extended warranty is not the best value for the consumer, since an extended warranty does just that — it extends the manufacturer's limited warranty, and that's all.

However, good extended service plans may, for example, cover damage from power surges or normal wear and tear. Some plans being sold today even include coverage against accidental damage from handling and spilled liquids. Coffee spilled on my laptop keyboard isn't covered by an extended warranty, but it may be covered by an extended service plan. These types of programs can be a great value to the consumer by protecting them from the unexpected.

Extended Service Plans or Extended Warranty - Who Needs Them?

It is also often mentioned that the odds of using an extended warranty or extended service plans are pretty low. But the magazines' own numbers show that, in many cases, failure rates of certain appliances could, for example, be as much as one in five. Whether that's high or low is debatable, but even so, the publications can't predict who is going to get an appliance or any other product with a problem any more than the retailer or the customer. As a customer, I would hate to be the one in five who has a problem.

Why Consumers Buy Extended Service Plans or an Extended Warranty

I do this for a living, so obviously I have a vested interest. That's why I find it frustrating that after all these years there's no attempt to understand the most important reasons people purchase these types of plans. They're the same reasons they purchase many other products: for the peace of mind and convenience they offer. Think of the peace-of-mind and convenience investments purchased for automobiles, such as navigation systems or roadside assistance from OnStar or AAA. For me, from a strictly dollars and cents standpoint, AAA is a bad financial investment. I certainly don't get my investment back in tangible service every year. However, I renew it annually, knowing I would rather have it and not need it than need it and not have it.

One particular article disparaging the extended warranty from an “unbiased” magazine stands out for me. The publication asked readers to share their stories by asking the loaded question, “Did you get a hard-sell from a salesperson pushing an extended warranty?” It's obvious they were only looking for the bad side of this product and in spite of it all ended up getting quite a bit of positive feedback. How about asking, “Tell me about your extended service plan experience?” Perhaps they are afraid to get the other side of the story. Maybe if they took an unbiased look at this industry, they would hear from the many happy and satisfied customers out there.

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Tom Hebrock

Tom Hebrock is Vice President of Retail Services for Stuart & Associates, a retail consulting firm specializing in Sales and Margin Growth Programs and Returns Reduction Programs.

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