Peace of Mind and Extended Warranty

Published by Tara Piazza, EVP Operations and Research, After, Inc. on July 21st, 2016.

It is conventional wisdom, and even occasionally is in the news as though it is a newly discovered scientific fact:  people who have lower stress and greater peace of mind in their daily lives are healthier, happier, and live longer.  But what exactly is “peace of mind”?  In general, peace of mind is a feeling of being protected from bad outcomes, or a sense that everything will be okay because of some extra steps taken.

In a commercial sense, people pay money for peace of mind all the time.  The desire to pay a little more to ensure a little extra safety can be observed in many actions, ranging from shying away from the food products close to expiration being sold at a discount, to paying more for a well-known brand of laptop.  People often pay extra for two-day shipping just in case the free 3-10 day shipping window ends up causing the order to arrive later than needed.  Party hosts will buy extra wine and food, thinking it is better to have too much than too little.  We probably all have spent money that, in hindsight, wasn’t necessary – but we did it for the peace of mind.

There certainly are scenarios where the likes of snake oil salesmen try to sell ineffective, overpriced, or downright silly solutions.  One sad example is people who invest their life savings with expensive, high-end money managers that are actually con artists squandering the funds.  Another is door-to-door alarm system sales scams that use high pressure to sign up residents to a long term contract.  The emotion calling for protection can and has been taken advantage of, probably for as long as there has been commerce.

Given that peace of mind is something we all purchase from time to time, and that we also have from time to time felt maybe we were foolish with our overly conservative purchase of something in the past, it is natural to have an uncertainty over whether or not we should buy extended warranties on the new products we purchase.  Consumer Reports annually publishes an opinion that extended warranties are not a good buy because of the low likelihood of a new product failing within the coverage period.  But yet, in a recent survey conducted by After, Inc., depending on the product category, between one-third and two-thirds of consumers purchase extended warranties on their new products.

If extended warranties are indeed a bad buy as Consumer Reports suggests, then why are they so popular?  When the After, Inc. survey asked consumers why they purchase extended warranties, they reported that they care most about the extended warranty being a good value for the money.  Breaking down what that means, essentially the customers weigh the cost of the plan versus the potential benefits, and if the extended warranty covers the repairs they expect to need in the time frame they expect to need it, then it becomes a question of math – pay a little now or possibly pay a lot later.  Buyers likely assign a higher dollar value on the benefits because of the “peace of mind” factor than non-buyers who are more risk tolerant.  Nevertheless, those consumers who buy extended warranties aren’t doing it out of foolishness, but rather out of a belief that the investment is worth it to them.

And how about the companies offering extended warranties, are they just out to take advantage of customers?  Perhaps there are some contract providers that overcharge for the value provided, just the same as the prevalence of overpriced restaurants with poor quality and service.  But in today’s commercial culture in which customer satisfaction is a primary objective of many companies, and in which social media can make or break companies, most extended warranty programs that are offered by reputable companies aim to ensure customers have a good experience with their product and the brand.  Furthermore, companies know that there is a cyclical relationship – the more affordable they can make the extended warranty, the more people can buy them, which spreads the risk among a larger pool of consumers, bringing down the price of the extended warranties and providing protection to the greatest number of customers.

Are extended warranties and service plans only for fools?  If you have ever had to make a claim for a product under a warranty or extended warranty, you will know that a smooth claim process provides a halo effect to the brand that took good care if you.  The After, Inc. survey confirmed that a good claim experience leads to customers having a greater willingness to buy that brand again, and to buy extended warranties again in the future.  If you’ve never had to make a claim, or if your claim experience was terrible, then you will be more doubtful of their value.  You will assign a lower probability to future use, and that will calculate to a lower dollar amount you will be willing to pay for peace of mind.

Peace of mind has a dollar value that varies for each person and each situation or purchase.  Paying more for peace of mind is not foolish.  It is a natural and often wise reaction to a human instinct to protect what is precious, hard earned, or worrisome, and the investment does pay off for many who buy them and save a headache or loss as a result.

Leverage After, Inc.’s experience to improve your warranty program.  If you would like to speak with After, Inc. regarding your business needs, please give us a call at 800-374-4728.  We’re always available for a conversation!