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Extended Warranties: Sensible Insurance or Waste of Money?

Written by: Linda Jacobson

Article Overview: Paul Champagne saved the Canadian Department of Defence more than a billion dollars over a ten-year period by "ripping up a couple thousand extended warranties", according to Maclean's magazine (6 July 2009). That's a number that's hard to argue with. So we took a closer look at extended warranties: the pros, the cons, who really benefits from them. The conclusion? Extended warranties are a very expensive form of insurance. They are a cash cow for retailers, yielding profit margins of 50% and more. The benefit to consumers is dubious, to say the least. This topic is the sixth in our 2009 white paper series: "Making every IT dollar count!" The full white papers are available on our website.

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Extended Warranties: Sensible Insurance or Waste of Money?

Overview

An extended warranty is a guarantee of a product under conditions of ordinary use, and covers a period after the standard, free warranty expires.
Extended warranties are usually highly profitable for retailers and a waste of money for consumers.

Main Cons

Extended warranties are expensive, at approximately 10% of the purchase price per year of cover.
Repairs typically cost about the same as the warranty.
Covered parts seldom break within the extended warranty window. Most faults occur within the first year, which is covered anyway.
For most businesses, keeping a couple of spare laptops in the office will cover the business continuity side of laptop or desktop computer failures.

Main Pros

If warranties offer a true business continuity advantage – not just replacement parts – at a fair price, and uptime is critical, then they are worth considering.
If you can negotiate a great price, or the warranty really offers a good deal, go with it.
Features to look for are on-site service, guaranteed response times and advance replacement.
Laptops that travel a lot and certain PCs might be worth covering, but laptops are likely to need additional accident cover.

If You Buy: How to Get the Best Value

Negotiate on price and shop around.
Consider third-party warranties.
Don’t pay more than 10% of the purchase price per year of warranty.
Make sure the extended warranty doesn’t overlap with the 1-year manufacturer’s warranty, effectively providing a year less cover.

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Article Tags: advance replacement, business continuity, computer failures, desktop computer, extended warranty, faults, free warranty, laptop, laptops, li li, replacement parts, response times, rsquo, third party, true business, ul, uptime, warranties, warranty, waste of money

About the Author: Linda Jacobson
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Linda Jacobson is Partner and General Manager at Nash Networks Inc. We provide computer support and managed IT services to businesses in Toronto and the GTA. Our clients are usually from 5-50 employees and often have complex IT needs and low tolerance for downtime. We manage several mixed Windows, Mac and/or Linux or UNIX networks. We are producing a series of articles in 2009 to educate business owners about IT, with a focus on costs, productivity, and cost-effectiveness. The series is titled, "Making every IT dollar count!"

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