Thursday, December 29, 2011

A Vivid Illustration of an Over-Priced Extended Warranty

One of the computers in my house came to the end of its useful life recently. In my house, that means ordering a new computer from Dell. Since I’m a tech guy and have techie friends, I’ve heard time and again how I can save money by buying cheap components and putting the PC together myself. But I’d rather leave it to Dell to put the system together and pay a little extra, but not too much extra.

I prefer to buy online, but the Dell web site didn’t allow me to make all the choices I wanted. This meant having to make a call to Dell. This also meant having to turn down all the high-margin items available as add-ons.

I was pleasantly surprised when the salesperson didn’t press me on an extended warranty after I turned it down; she just went on with the list of other choices. However, when we came to the end, she began a script: “You know sir, you’re buying an expensive computer...”.

For a mere $119 I could extend the standard warranty from 1 year to 2 years. After I turned down this offer a miracle happened and the extra year of warranty dropped to $79 in 10 seconds. After I refused again, it took only 10 more seconds for it to drop to $60. Yet another refusal by me didn’t create any further drops in price.

I don’t know what an extra year of warranty costs Dell, but I’m guessing that it’s much less than $60. This makes the original price of $119 seem like a big gouge.


  1. I've bought my last couple computers "stock" or pre-configured. I bought Acers. Just seemed like the prices were better, and I'm no power user. I do recall doing a lot of research and having a custom computer built about seven years ago, but that was a lot of work, and I didn't want to get up to speed on current technology again.

    Seems like Dell is a good destination if one is looking for something a little higher end, and more customizable.

    Your example seems to indicate there's not a high percentage of computer problems occurring in the second year of ownership. I always turn down extra warranties because I assume the seller knows better than me what the odds of failure are and they price in a decent margin, as you note. Advice I live by now is to insure against things you can't easily afford to repair.

    I recently had a refrigerator fail after about six years. The repairman said even if I had the extended warranty, it would have expired by then.

  2. @Gene: It can be frustrating to have a computer or some other device fail before you think it should, but I'm much further ahead turning down extended warranties than if I bought them. I agree that it makes little sense to insure something if I can easily afford to replace it.

  3. My personal rule on extended warranty is strictly based on the PITA factor (pain in the ...)

    Replacing a computer that failed.. small PITA. Lifting a washing machine out of my basement and taking it to a depot in my tiny mazda... Big Pita. Translation: Turn down the warranty on the computer, buy the in-home service warranty on the washing machine.

  4. @Anonymous: PITA is definitely an important factor. For example, when I'm trying to decide whether to replace one of my cars, I assign a cost to the possibility of being left stranded by a broken-down car. I tend to drive cars into the ground, but not so far that I would tolerate being left stranded multiple times.

    On the subject of washing machines, I've had some success with diagnosing problems myself with help from Google searches. One time with a dryer, a web page actually told me which resistor had blown out based on the symptoms! Appliances tend to break down in predictable ways sometime after the initial warranty and extended warranty run out. A little Google knowledge can help find the part of a washing machine that has to be patched to stop a leak. I tend not to attempt bigger (and more expensive) repairs because it makes more sense to buy a new machine. I'm about 50/50 between fixing problems myself and just buying a new machine. Either way, the PITA factor is fairly low.

  5. I believe Gene got it right. The seller of insurance knows the value of the insurance, and we do not.

    It's similar to buying a PUT option on the computer.

    However, we can use common sense. If the computer is $1,000 (you said it was 'expensive'), then paying $119, or 12% of the cost is an outrageous price. We know the failure rate is far less. Even 6% feels too high.

    When it comes to insuring a home, we must pay the outrageous premium because we cannot afford to replace the home. It just costs too much. But we can take the chance on a brand-new computer.

  6. When I last bought a Dell laptop in 2007 I took the 3 year extended warranty (because I didn't know as much about this stuff back then). It turned out to be worth it because the motherboard and harddrive failed with one month remaining, but I don't think I'll do it again. That warranty also covered accidents and spills, something that is rarer nowadays.

    At that time I chose Dell for the customization. More recently I found they offered significantly fewer options, perhaps limited to upgrading the processor or adding ram. The internet tells me they reduced customization options in 2008, which is too bad. It was a great way to "build" a computer without doing the work.

  7. @Mark: Well said. When the cost of replacement is low, it's just a numbers game.

    @Lewin: I use laptops at work. Every kind seems to have problems. I think that computers are just not meant to be shaken and dropped. I use desktops and tablets at home.

    At least you got value from your extended warranty.

  8. Michael has a point about laptops. I've owned two now, and they always seem to suffer some sort of odd issue. Random crashes, bad RAM, failing displays/hard drives, etc. Convenient, yes, but not as reliable as a desktop.

  9. @Michael -- yes definitely. Overall I've been very happy with this dell laptop. Except for that one repair it has been working smoothly for almost 5 years now. But I don't take it places very much. And I realize now that I got "lucky" in the sense that my warranty paid off but I don't buy them any more.

    But an exception is the warranties at Costco! I bought a $50 extended warranty for something. I don't make a claim they refund me a $50 costco gift card. So the cost of the warranty is an interest-free two year loan to costco.