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Extended Warranties are for Suckers

While I don't often give in to the techie compulsion to have the latest and greatest gear, I think I purchase more tech stuff than the average non-techie, particularly when it comes to computers. Back when I was an independent software developer, I was always a little paranoid about having my computer go out of commission, and so I gladly forked over an extra couple of hundred dollars for the extended warranty.

In the past fifteen years, I've never had to make use of the extended warranty. I've had to make use of the standard one-year warranty twice: once with the faulty hard drive on a Toshiba laptop and once with a company-issued Dell Inspiron laptop whose video card preferred to display static.

That's to be expected. Many products, electronics included, generally fail either very close to the start of their working lives or at the end of their expected lifespan from wear, tear and regular use. The “bathtub curve” is a term that's used by statisticians to describe the probability of failure of these products, and it looks like this:

Bathtub curve

I stopped buying extended warranties around 5 or 6 years ago because I was beginning to get the feeling that they were nothing more than a surcharge for the overly cautious. Between never having had to make use of them, constantly falling prices and the rather suspicious insistence of salespeople that I should buy one, even for items that cost less than 50 bucks, I was getting the gut feeling that they were a rip-off.

Someone's done the math and my hunch was right. A New York Times article titled The Word on Warranties: Don't Bother expains why:

  • They're actually a profit center for retailers. The margins on electronics are very thin, but they extended warranty margins are as high as 80%.
  • It's a sucker's bet: you're betting against the bathtub curve and you're also betting against the trend of falling prices in the belief that the cost of repair will exceed the cost of replacement.
  • A Consumer Reports study shows that only 10% of digital cameras fail in their first five years. For the extended warranty to be valuable, it would have to be less than 10% of the purchase price, yet extended warranties often cost as much as 20% of the item's price. Besides, if you had a five-year old digital camera, you'd probably want to replace it, not repair it.
  • Last year, suckers spent $16 billion on extended warranties.

So take it from us (and the New York Times too): skip the extended warranty.

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