Do You Need an Extended Warranty for Your New Gadget? Do the Math, Says Square Trade

Do You Need an Extended Warranty? Do the Math, Says SquareTrade

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trust, safety, and problem-solving were at a premium. “We came upon the warranty industry, an enormous industry that is fundamentally not consumer-centric,” he says.

Over the last seven years, SquareTrade’s strategy for reinventing itself and disrupting the warranty industry has been two-pronged. First, it decided to offer warranties at lower prices. A typical SquareTrade protection plan amounts to roughly 15 percent of the unsubsidized cost of the covered item. A two-year iPhone plan, for example, goes for $99, which is about 12 percent of the $850 price tag on an unsubsidized iPhone 5 (the price you’d have to pay out of pocket if you had to replace the phone and you weren’t yet eligible for a new one under your mobile contract).

“We have been a major force in lowering the price of warranties,” Abernethy says. And in fact, data from 2006 shows it wasn’t unusual for retailers to peg two-year warranties at 16 to 19 percent of the sticker price for an item like a camera or a TV.

Abernethy says SquareTrade is able to charge less because of its automated claims processing, the efficiency of its logistical operations, and the economies of scale it can obtain on repairs and replacement items. The company has a warehouse full of new phones and tablets ready to be rushed to customers.

The second part of SquareTrade’s strategy addresses the transparency issue. The company brands itself prominently in stores and on e-retail sites, so potential customers know who they’re buying protection from. There’s no point-of-sale pressure; gadget buyers have 30 days after the original purchase to research warranty plans and make a decision.

For policyholders, the company tries to take the stress out of filing a claim. SquareTrade warranties are saved online, so the customer never has to dig up paperwork (which may be lost, or hard to find) to file a claim. And they don’t have to call an 800 number or haggle with an agent to get a claim moving—they can do everything online.

“We said, ‘Let’s use technology to remove the cost of servicing claims and make a better claims experience,’” Abernethy says. “The ATM has transformed getting cash out of a bank. Why should you need to talk to a person to fix your cracked tablet?”

Finally, to make sure no one is left holding the bag, SquareTrade introduced a five-day service guarantee. The company promises to either fix an item and ship it back within five days of receiving it, or reimburse the customer for the item’s purchase price. If one of those two things doesn’t happen in five days, SquareTrade refunds the warranty price.

It all sounds great. And it seems to be working. Consumers give SquareTrade largely positive reviews on retailer sites and Facebook, and the company says its sales tripled in 2011 and nearly doubled again in 2012, although it doesn’t provide absolute numbers. To position itself for even faster growth, it raised a whopping $238 million in new funding from Bain Capital in early 2012, and moved into swanky new offices in downtown San Francisco.

But even if you take everything Abernethy says at face value, there’s still the big question: is an extended warranty worth the price?

Unfortunately, there’s no objective way to answer that—just as there’s no verifiable way to say that the $300 you spent on travel insurance for your last vacation was wasted just because you didn’t get sick or your cruise line didn’t go bankrupt. An extended warranty is a form of insurance, and like all insurance, it’s partly about peace of mind.

But SquareTrade clearly picked a good time to get out of dispute resolution and move into electronics warranties in 2006. That was the cusp of the mobile-computing explosion. Now millions of people have a high-value gadget on their person at all times. “A smartphone or a tablet is fundamentally a portable piece of very expensive glass,” says Abernethy. “A lot of people might say, ‘I don’t think my TV will ever fail.’ But even the most cynical people drop their tablets.”

Abernethy says SquareTrade’s data shows that if you own a smartphone for three years, there’s a 1-in-3 chance that it will be damaged in a fall or a liquid spill—“unless you carry it inside a rubber ball, and you don’t drink coffee, and you live in a hermetically sealed environment.”

In the mobile age, Consumer Reports’ advice about extended warranties is “just inaccurate,” Abernethy argues. That organization’s distaste for extended warranties is based partly on the fact that many consumer appliances are more reliable these days, and less likely to suffer component failures during the warranty period. But a $7,500 Sub-Zero refrigerator is unlikely to fall out of your pocket. “Drops and spills just completely blow that logic out the door,” Abernethy says.

SquareTrade has found that the risk of a crippling drop or spill is even higher for certain groups—including, for obvious reasons, people who ride motorcycles, belong to big households, or live in homes with hardwood floors. (There are a few other risk factors that are a little harder to explain, including having a tattoo, trading stocks frequently, or having sex more than twice a week.)

So the question of whether to buy a warranty with your new gadget, Abernethy says, boils down to whether you think you can defy the odds—and whether you can afford to buy a new phone if you’re one of the unlucky ones. It’s basically a question of risk and severity: even a low-risk event may be worth insuring against, if the cost of the event is too high to bear. (Of course, one alternative to paying out-of-pocket for a new phone is to send your broken one to a repair company like iCracked, but that might not be much cheaper than just buying a warranty.)

“Fundamentally, our goal is that [extended warranties] should make sense economically,” Abernethy says. “If you crack or submerge an iPhone you are basically out a $700 item. So the math actually does make sense.”

To many people, anyway. Personally, I’m too much of a tightwad to pay for extended warranties, and I justify that decision by telling myself I’m more careful with my gadgets than the average person.

There’s no guarantee, of course, that I won’t end up like my brother, who had to buy a new logic board for his MacBook Pro after his young son puked all over the keyboard. (Now they call it the BarfBook.) But I’ve been lucky so far—knock aluminum.

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The Author

Wade Roush is a contributing editor at Xconomy.

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  • Andy

    The answer is No, I do not need an extended warranty.
    Have you ever heard of Betteridge’s law of headlines?

    http://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines

    • http://www.xconomy.com/san-francisco Wade Roush

      Okay, point taken, Andy. But from an editorial point of view, let me ask you this: Would you be as likely to read a story with a headline that said, “SquareTrade Says You Need an Extended Warranty?” Of course not. Plus, the whole gist is that I’m investigating something that, to me, is a real open question — and it remains so even after the piece has ended. So I’m not inclined to apologize for the headline.

      • http://www.facebook.com/cdecoro Christopher DeCoro

        Hi Wade,

        Thanks for the article! As someone who puts probably-far-too-much money into camera equipment, which are prone to mechanical failure and thus in need of costly repair, the question in your headline is exactly one that I’ve been asking myself. I’ve wondered specifically about SquareTrade, given that I’ve seen them frequently on eBay, and I found it very helpful to read your article and learn something about the company. I’d generally held the same negative impression about extended-warranty plans, but based on your article, I’d consider giving SquareTrade a second thought.

      • http://www.socialbakers.com/ Michal Smetana

        “But from an editorial point of view, let me ask you this: Would you be as likely to read a story with a headline that said, “SquareTrade Says You Need an Extended Warranty?” Of course not.” Exactly! I mean, creating headlines for a blog is almost as important as writing a good article beneath it. In today’s time of Twitter and Facebook sharing, the first thing people see is the headline and if the headline is not appealing, they won’t even click the link to see the remaining article. Thumbs up for a great headline and even a better article.

  • http://www.facebook.com/EmmanuelSanders Emmanuel Leroux Sanders

    The one thing not taken into account, is first of all does the warranty cover accidental damage like if I drop it, I always thought the warranties didn’t cover that. Secondly, how much will that 700$ phone cost to buy used on ebay in 2 years time if it does break? That’s the true replacement cost.

    In the end the question is, is the cost of the event more than you can bear by self insuring, since the amounts are low (compared to say a house burning down or the liability of causing a 10 car pile up on the highway) you are probably better off putting the money you would spend on the warranties in a bank account or buy some GICs and use that money to buy a new device should you break one, not to mention that in 3 years I probably would not want the same phone if it broke, you would be free to buy the same phone, a better phone or simply one that meets your needs better.

    In the end, they are making a profit, therefore the amounts they take in warranties is more than the cost of the devices they replace, all their staff and real estate etc… otherwise they would go bankrupt (This is of course true of all insurance).

    It is great to see them bringing the premiums down to be more in line with the odds of them having to pay out, I agree that at 20% it is a HUGE ripoff, down at the 12% level, it becomes more reasonable. But once again, it is a hugely depreciating asset, my Galaxy Note that was 700$ new last year can now be had on eBay for 200-300$.

  • http://www.facebook.com/jelly.andrews.7 Jelly Andrews

    I guess extended warranty is a good idea for some but is another expense for others. It all depends on its coverage and the type of product you purchased. If the product is prone to damage, then I guess extended warranty is a must.

    HyundaiUSA-Warranty.com

  • http://www.facebook.com/captainsavaho Angelo Maimone

    At the end of the day you need good phone insurance or warranty options. In my opinion esurranty.com beats squaretrade hands down. I’m sure squaretrade paid to post this, but in the end I say compare the two and see for yourself. Esurranty.com offers more including loss and theft and doesn’t have over 130 bbb complaints in a year as squaretrade does.

  • tornadot

    It’s less about “what” extended warranty covers (or not) and more about the hassle and nightmare of making claims on the extended warranty contract. I just had to jump through fiery hoops to get a simple preventive maintenance visit done — supposedly covered by a “gold” warranty plan on kitchen appliances. I practically have to take blood pressure pills because of this. I’d rather not have this plan and pay for maintenance if / as needed. They are not worth it!

    • purekhaos

      If you read the article, one of the main points is the ease of filing a claim. I’ve never used Squaretrade personally, but it is a bit unfair to point out an issue you had, in an article explicitly explaining that that is an issue, but ST has simplified it.

  • Johan Michal

    I think offering an extended warranty is pretty common practice. I never used mine, but it is nice knowing that if I needed it, it will be always there.

    http://amtwarranty.wordpress.com/

  • Cheryl

    Hmm square trade is worth it and I use them a lot just got my $350 back today in my paypal account from them and my warranty was under $100. The first claim was for my tv, the repairman came and fixed it, it’s always no hassles. I thought nothing would never happen to any of my electronics but I was wrong. Accidental including spills, drops etc square trade covers it all.

  • Angelo Maimone

    The best extended warranty that offers the most coverage at the lowest price with the lowest deductibles and starts the day you sign up is http://www.esurranty.com

  • Mikey Boccanfuso

    I understand the uncertainty people have when it comes to purchasing an extended warranty. It is important to understand that not all extended warranties are alike, and the value of having an extended warranty varies depending on the product purchased.

    I do believe that it is valuable to consider an extended warranty for a vehicle should be considered if you plan to drive the vehicle past the standard miles included in the manufacturer’s warranty. Repairs can get pricey without having an extended warranty, however, there are certain parts or systems that aren’t covered by an extended warranty at all. Also think about if the warranty is transferrable to a second car owner if you should sell your car in the future. There are a number of extended warranties that are transferrable to second car owners, and can actually increase your vehicle’s re-sale value.

    http://www.besthyundaideal.com/what-is-the-value-of-an-extended-warranty/

  • kn_osmo@yahoo.com

    Also, check out this link:

    http://www.droidforums.net/forum/ensquared/88689-ensquared-phone-insurance-versus-squaretrade.html

    It was written in 2010 (updated thereafter to reflect accuracy) but it would seem to answer the question made by this headline (which would be a resounding NO, it’s not worth it)

    Excerpts from specified link above:
    [

    Examples are as follows: Square Trade still offer no Lost & Stolen
    options meaning that no matter how you look at things they are going
    over the heads of more than 50% of the potential market. Accidental
    damage and extended warranty is the long and short of their offer - and
    even then it is affected by a HUGE serious shortcoming: Their claim
    limit is a set number that does not go above $599 at best (on most
    expensive Android phone) and goes as low as $299. What this means in
    basic terms is that the subscriber can only claim until the claim limit
    is used up. It reduces every time you claim by value of the replacement.
    Well aint that a thing! If you damage an upmarket Droid irreparably
    that claim will easily match $599 in one go; smaller claims may go into
    the claim limit perhaps 1.5 times - rarely twice in our view. Therefore
    to call it a two year warranty is confounding. It really is a warranty
    that covers you for the claim limit and may in effect last only for 1
    claim on one day. If it occurs in the second month then "poof" goes the
    remaining 22.

    So why do SquareTrade claim it is a two year warranty? Because
    technically by adding on the extended warranty part, which only kicks in
    after year 1 it does extend into year 2 even if the accidental part of
    the deal is gone. But what good is Year 2 with extended warranty if in
    fact the accidental damage protection expired early in Year 1? It leaves
    you the Droid subscriber naked for drops, spills, lost and stolen
    protection all for the so called extended warranty cover: Essentially
    cover for factory default after manufacturer's warranty drops off.

    Really SquareTrade offers a disjointed program with small pieces of
    different items; leaving out others; and unlikely to have the timing
    right at all. Net result if you understand this: Impractical cover on
    accidental damage that is excessively limiting; no Lost & Stolen
    whatsoever. The only full item is extended warranty that is a second
    year thing anyway.]

  • Johan Michal

    Before making decisions to purchase an extended warranty one need to be very sure that the product really needs an extended warranty. It depends upon the type of product that you have purchased. Thanks for sharing this post.

    AMT Warranty

  • Beth Toraason

    One week and one day after the warranty on my POS Samsung microwave expired, the touch pad went out. I paid over half the purchase price to get it replaced. Now, six months later the magnatron has gone out. My first microwave worked for twenty-three years, my second less than two. I found this article while searching for an extended warranty for my third one. My answer is “Yes”.

  • jb

    A rip off. Bought a camera on ebay I wouldn’t have bought, but the warranty made it attractive. Three months later and the camera quits, their only solution is to agree to a different contract, well less then what I purchased. And they are totally ignoring me, unless I agree to this new lesser contract.

  • Jason

    That plan is not perfect at all….Look what happened in this case:

    Dear all,

    I am new here and I hope you don’t mind I try to seek advise here.

    In May 2013 I bought a Canon G15 at B&H with a Square Trade Protection Plan with Accident Coverage.

    A year later I had an accident here in France with my Camera. I informed Square Trade and they sent me in an email that I should go to visit a local shop. So I did. I went to a local camera shop and they sent it basically to Canon France. Canon wants now to replace the whole camera block because I was told it is a block. Costs are estimated around 520 $, the insurance covers only the purchasing price which was 450$.

    Before I sent the camera away, I pointed out to them that repair costs in Europe are high and it would be cheaper to organise a new camera for me and ship it to me. That was refused.

    I have also pointed out to them that I am in France!

    I also received an email, pointing out, that I should contact them in case these costs are higher then 450$. So I did, but now they suddenly demand I should ship my camera which is at Canon France back to US. Why do I have to pay twice for shipping now because in first place they suggested local dealers here in France!

    Also, they want to complete my warranty but I paid for 3 years coverage.

    It is big joke and I don’t know what I should do. I offered them solutions, but nothing was good enough for them. I have no camera, no money, just a lot of trouble with this company.
    Of course, they refuse to pay me currently anything and I have no camera.

    Was somebody in a similar situation and could offer advice?

    Thank you sincerely for your help.

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