Demand For Warranties Still Strong Despite Falling CE Prices

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Historically, business for third-party service administrators tends to boom with each new wave of pricey, cutting-edge consumer electronics.

A consumer, the theory goes, is more inclined to protect his or her investment in high-end gear by extending the manufacturer's warranty with longer-term service contracts.

So what impact are rapidly falling price points -- particularly within the computer category -- having on demand for extended service provisions? Are consumers still concerned about covering their assets in the age of the $400 or free PC? And for those who are, what kind of crimp are these smaller transactions putting in administrators' bottom lines?

The answers, say administrators, are threefold. Yes, consumers are still snapping up extended service plans to protect their products and secure long-term technical support, although they're clearly a harder sell. And yes, the increase in sales volume triggered by falling CE prices has helped keep demand for warranty products robust.

However, in order to keep profits up while prices fall, administrators are scrambling to cut costs and find alternatives to expensive on-site service.

"It's a real, real challenge," acknowledged Scott Kranzberg, Aon Innovative Solutions executive VP of sales and marketing. "It still costs us the same to dispatch a service call for a $400 PC as it does for a $4,000 PC, and it costs the same amount to take an inbound phone call regardless of the cost of a service contract. It's something that all of us -- administrators, retailers and manufacturers -- are struggling with."

One way to counter the fixed costs of labor and parts, Kranzberg said, is to provide consumers with a knowledge base, be it online or loaded onto a PC, that encourages self-help. The strategy, he noted, originated with manufacturers but is being emulated more widely by service providers.

Another way to lower costs is to either depot products or offer carry-in service as alternatives to expensive in-home repair, while the most obvious approach is to shorten the term of coverage. "By lowering your exposure, from three or five additional years to one or two additional years while maintaining similar terms, you manage to cut out some of the costs," Kranzberg said.

Another solution, recently introduced by GE Warranty Management, is the outright replacement of lower-cost products, which is a less costly program to manage and can help spur low-end sales. In GE's case, coverage is offered on products with a price point of $399 or less.

"With newer technology products there's still a higher propensity for consumers to buy service contracts for the peace of mind they bring," explained general manager Dave McCalpin. "But with older technology products, you have to come up with more creative ways to provide service, and you have to find alternatives to lower the cost of coverage.

"The price of a contract that would justify the cost of in-home service is too high relative to these products, but replacement allows us to price the program to the retailer where it will be more attractive to consumers."

Under the plan, consumers still call GE for service, but rather than dispatch technicians to homes, the company issues a store credit or gift card or authorizes the consumer to make a physical exchange back at the store, depending on the retailer's preference.

Other service administrators, however, seem less concerned about tumbling price points, so long as demand for extended service contracts remains strong. And it has.

"As prices continue to come down, the overwhelming bias continues to be the complication of these products," observed Tony Nader, the recently named president of National Electronics Warranty (N.E.W.). "Consumers are more and more out of their element as electronics products become digitized. In addition, ours are products of convenience, not just indemnity, and consumers want help over the phone. This helps reduce returns and keeps the products sold."

The array of peripherals for which consumers still want protection is also keeping contract rates afloat amid sinking PC prices. AIG Warranty Group Matt Frankel said, "Although the cost of PCs has come down, integration remains high, and consumers want to make sure that not only their PC but their modem, their mouse and their printer are working properly. They want to have someone to call in case of trouble."

Indeed, rather than see price compression as a cause for concern, Jim Tucker, president of VAC Service, welcomes it. "Given the explosion of lower-priced merchandise, especially computers, the sales opportunities for extended service plans have expanded exponentially," he said. "It means more service contracts for us, and the increased volume more than makes up for the lower prices of the contracts."

Moreover, he argued, service contracts are becoming an even more important profit source for retailers, precisely because margins are coming down on CE products.


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