Consumer Perceptions of Extended Warranties and Service Providers. Gerald Albaum, University of New Mexico James Wiley, Temple University.

Transcription

1 Consumer Perceptions of Extended Warranties and Service Providers Gerald Albaum, University of New Mexico James Wiley, Temple University Abstract The marketing of the extended warranty for a consumer durable good such as a computer has become big business and a significant component of profit for many companies. However, some claim that there is deception involved in what the extended warranty actually extends. The present study involves a survey of a large sample of consumers in the United States to assess their perceptions of extended warranties and related issues with particular emphasis on warranties associated with the purchase of computer by a non-store retailing mode. Significant differences between perceptions of females and males were observed. A major finding is that consumers believe service to be provided by the manufacturer, when if fact, it is done by an independent service company. Introduction Extended warranties are offered for a wide range of durable consumer goods, including automobiles, home appliances, and electronics. They are offered for sale directly by manufacturers, retailers, and independent agents (Day and Fox, 1985). In addition to generating direct profits, extended warranties are used as a means to retain customers. To illustrate, a system builder in the United States offers three-year extended warranties on notebook computers in order to maintain customer loyalty as well as generate additional revenue (Zarley, 2005). To those marketing such consumer durables, extended warranties can be very profitable. According to one study (Desai and Padmanabhan, 2004), the percentage of consumers purchasing such warranties ranges from 20% for automobiles to 75% on home electronics like stereos and computers. The Consumer Electronics Association estimated that only 20% of consumers purchasing an extended warranty for an electronic device ever use the service (Noel, 2001). It is clear that this is a big and highly profitable business, especially for retailers like Best Buy and Circuit City (Berner, 2005). Extended warranties offer retailers margins ranging from 44% to 77% (Noel, 2001), and can account for as much as 50% of an independent retailers profits (Baird and Benady, 1996). A question has been raised in the literature regarding whether an extended warranty is a good investment for consumers. Answers to this question, which are varied, are provided elsewhere (Maronick, 2007; Consumer Reports, 2006; Bradford, 2005; Day and Fox, 1985). One indication that the purchase may not be a good investment, at least for some products, is provided by Bradford (2005) who shows that the repair rate within the first three years of use of selected products varies as follows: desktop PC (37%); laptop PC (33%); washing machine (22%); gas range (19%); dishwasher (13%); clothes dryer (13%); digital camera (8%); 25 to 27 inch TV (5%). What, then, does the extended warranty mean to the consumer? Prior research has indicated that consumers view an extended warranty as a signal of product 1

2 reliability/quality, a means by which perceived risk can be reduced, and from a perspective of deriving benefit from the cost of the purchase (Maronick, 2007; Kelley and Conant, 1991). When viewed as a means by which perceived risk can be reduced, according to Hollis (1999) an extended warranty becomes a form of insurance. In addition to the above, warranties are used by manufacturers to screen consumers in order to increase profits. Soberman (2003) studied what happens when screening and signaling happen simultaneously in the used-car market. He found that the need to signal can seriously impair the ability of a high quality seller to screen (Soberman, 2003, p. 188). Finally, from the perspective of retailers, Voss and Ahmed (1992, p. 885) concluded that there are three types of consumers who are predisposed to purchase an extended warranty: (1) those who are inherently very risk averse; (2) those who have experienced prior losses in the product category; and (3) those who use a price-seeking search strategy. The Research Question There are ample opportunities for buyers to misinterpret the provisions of extended warranties. While the extended product warranty is promoted by those selling them as an extension of the durable consumer goods manufacturer s original warranty which may be 30 days, 90 days, or one year depending upon the product such is not always the case. That is, for many products such as consumer electronics, the extended warranty includes the original manufacturer s warranty time period within the time period of the extension. Furthermore, it often (if not usually) is the case that the manufacturer, retailer, or independent agent selling the extended warranty is not the company that will provide the service covered by the warranty. The purpose of the present paper is to report on a study that examines consumers perceptions of extended warranties that are marketed by the manufacturer of computer products for an independent service provider. Specifically, the computer product is purchased by mail catalog, the Internet, or telephone ordering. In this situation, the manufacturer typically has a statement in a footnote in its advertising and on its website as follows: In-home service may be provided via third-party contract with customer. Technician will be dispatched if necessary. In order to request service, the consumer contacts the manufacturer. The major research questions addressed in this paper are: Do consumers value the benefits promised by extended warranties? Is the question of who provides the warranty services an issue for buyers? Do purchasers correctly perceive who provides warranty service? These questions have not been examined in the literature. Thus, the present study can be viewed as somewhat exploratory in nature. Methodology A survey was conducted of a large national sample of the general public in the United States. The mode of data collection used was the Internet. A commercial list broker provided the sample of addresses. An invitation to participate in the survey indicating a link to the website where the questionnaire was housed was sent by 2

3 to the original sample members. The questionnaire included eight statements structured as Likert scales of agreement. A five-category response format was used: strongly agree, agree, neither agree nor disagree, disagree, strongly disagree. A sixth option, no opinion, also was provided. The statements covered concerns when purchasing a computer by mail catalog, the Internet, and telephone ordering. Of particular interest was need for repair service, and who was performing the service. In addition, two demographic questions were asked gender and age. Results Results are presented in two parts. First, a brief reporting of sample characteristics is presented. Second, perceptions of respondents regarding warranties and repair service are discussed. Respondent Characteristics From the original large sample, a total of 9,541 persons clicked on the website. Of this total, 1,686 completed the short questionnaire. This number represents a 17.7% completion rate. While not particularly high, this completion rate seems to be reasonable for an Internet-based mode of data collection using a non-panel general public sample. Kapolitz, Hadlock, and Levine (2004) report a 20.7% response to an e- mail request of a sample of students. Roster, Rogers, Albaum, and Klein (2004) report a 27.9% response for a controlled panel-based sample of adults. Turning now to specific characteristics of respondents, the distribution of gender (N=1676) is 69.5% female and 30.5% males. For age, the mean age is 44.1 years, and the median age category is years. Perceptions of Extended Warranties Table 1 shows the results of this aspect of the study. Overall, respondents tended to agree or strongly agree that availability of local at-home service was important to them (77.0%), they would pay extra money for an extended warranty and service policy if the service was done locally (56.3%), that more generally where they would have to go for repair service would not influence their decision to purchase a computer by mail catalog, the Internet, or telephone ordering (55.3%), and that for needed service the service technician would be from the manufacturer (68.7%). At the same time, respondents tended to disagree or strongly disagree that a product warranty and service policy are the same thing (72.7%). For each statement, less than 3% of the sample indicated that they had no opinion on the matter presented. In all the above situations, there was a significant difference between the genders, with females agreeing more strongly than males, except for the question of whether a warranty and service policy are the same thing, where males disagreed less strongly with the statement than females. Table 1. Mean Values of Agreement with Scale Items, By Gender a 3

4 Gender All Statement Respondents Female b Male c p 1.The availability of local at-home repair service would be important to me if I purchased through mail catalog, the Internet, or telephone ordering a computer that some day might need servicing If I were purchasing a computer by mail catalog, the Internet, or telephone ordering I would pay extra money for an extended warranty and service policy (i.e., extended beyond the normal warranty period) if the service was to be done locally than if it were done at the manufacturer s location Where I would have to go for repair service (locally, return to manufacturer) would not influence my decision to purchase a computer by mail catalog, the Internet, or telephone ordering A product warranty and a service policy are the same thing If I were purchasing a computer by mail catalog, the Internet, or telephone ordering and I purchased an extended warranty and service policy, I would view the service technician to be representing the computer manufacturer even if he or she was from an independent third party service company a Scored from 1 to 5 where 1=strongly disagree and 5=strongly agree. b The number of respondents varied from 1134 to c The number of respondents varied from 495 to 499. One might expect age to affect one s perceptions. Correlation analysis was used to assess whether there was a relationship between perceptions and age. Overall, the correlations relating to the five perception scale items shown in Table 1 ranged from less than.01 to.03, none of which were significant. An interesting pattern emerges when gender is considered. The correlations for males ranged from less than.02 to.07 (none significant). Females, however, had correlations ranging from.06 to.15, four of which were significant at.06 or less. A word of caution! The sample size for females was more than 1,100 and Mohr (1990) points out that almost any small relationship will be statistically significant with very large samples. Beyond the gender differences stated above, the most interesting result is that respondents overall perception of the person who would be performing necessary service is that he or she would be from the computer manufacturer, even though the service provider was, in fact, employed by an independent third party service company. Gender difference was not significant (p=.473). 4

5 Discussion and Conclusion A large-scale survey of the general public in the United States was conducted to explore issues regarding the purchase of a computer by mail catalog, the Internet, or telephone ordering. Since the present study is in many ways exploratory i.e., the specific topic has not been studied previously there is no formal testing of hypotheses or propositions. As to the research questions, the results indicate that consumers value the benefits promised by extended warranties. While the average consumer does not attach great importance to where service will be provided, there are some who do. Finally, customers perception is that the manufacturer is responsible for honoring the warranty, even though an independent third party provides the service. At least two major questions arise from the findings that suggest the need for further research: 1. Why are there differences between females and males in their perceptions of service and paying for an extended warranty? 2. Why do consumers view the independent service company technician to be representing the manufacturer? The latter question is relevant to the issue of manufacturer signaling, an issue that should be of concern to the manufacturer, and has clear implications for managerial action. Apparently, it is not sufficient to indicate with a small-print footnote in advertising or websites that the extended warranty is being sold for a third-party. Somehow, this fact must be made more prominent in any promotion. Also, the fact that a consumer must call the manufacturer to obtain service under the extended warranty also leads to misperceptions. Although the manner in which the extended warranty is marketed is not designed to be deceptive, it appears that deception is an unintended consequence. Since the study was conducted in one country, a third possible question may arise are the findings applicable to other countries? In order to answer this, further research is needed that is cross-national/cultural in nature. It would be helpful to extend this research to examine literature on consumer understanding, misunderstanding, or knowledge of other complex goods and services. Hopefully, this would provide insights that could lead to the development of research questions, hypotheses, or propositions regarding extended warranties and service providers for subsequent testing References Baird, R., Benady, D Money trap guarantees. Marketing Week 19 (July 26), p. 32 Berner, R Watch out, Best Buy and Circuit City 3960 (November 21), pp Bradford, S.L Extended warranty rip-offs. SmartMoney.com. 5

6 Consumer Reports Appliances: where to buy and how to save. August, pp Day, E., Fox R.J Extended warranties, service contracts, and maintenance agreements a marketing opportunity? Journal of Consumer Marketing 2 (4), pp Desai, P., Padmanabhan, P Durable good, extended warrant, and channel coordination. Review of Marketing Science 2 (2), pp Hollis, A Extended warranties, adverse selection, and aftermarkets. The Journal of Risk and Insurance 66 (3), pp Kaplowitz, M.D., Hadlock, T.D., Levine, R A comparison of Web and mail survey response rates. Public Opinion Quarterly 68 (1), pp Kelley, C. A., Conant, J. S Extended warranties: consumer and manufacturer perceptions. The Journal of Consumer Affairs 25 (1), pp Maronick, T.J Consumer perceptions of extended warranties. Journal of Retailing and Consumer Services 14, pp Mohr, L.B Understanding Significance Testing, Sage Publications, Newbury Park, CA. Noel, C.P More coverage with that? Consumers seldom benefit from extended warranties. Christian Science Monitor, October 15, p. 15. Roster, C.A., Rogers, R.D., Albaum, G., Klein, D Response characteristics from Web and telephone surveys. International Journal of Market Research 46 (3), pp Soberman, D.A Simultaneous signaling and screening with warranties. Journal of Marketing Research 40 (May), pp Voss, G.B., Ahmed, I Extended warranties: a behavioral perspective. Advances in Consumer Research, 19 (1), pp Zarley, C Warranty revival. CRN March 14, pp