Answer (From Marketplace.org 2 minute audio clip): Over $42 Billion

Questions: 

1. What are examples of product that typically offer warranties?
2. Have you ever bought a warranty? For what product?
3. Do you think warranties are a good deal for consumers? Why or why not?
4. Do you think this is a profitable business for the warranty company? Why or why not?

My warranty story: I was fresh out of business school twenty years ago working with an investment management business. One of my first tasks was to do a deep dive to understand the consumer electronics industry. I spent hours visiting the Circuit City chain, poring over their financials, talking to analysts and observing their sales associates (they had the best in the business). No product was sold at Circuit City without a “hard sell” to convince customers to purchase the extended warranty.

Among the more interesting words I heard come out of a salesperson’s mouth were along the lines of this: “You know that the people making this TV live in bamboo huts so I am sure you will want to buy one of these warranties to protect your investment.” A delicate dance for the salesperson to be sure…you should buy this TV but I’m not sure about the quality so you better buy the warranty. Well, when I dove in deeper to their financials, it quickly became evident that Circuit City was really a warranty company masquerading as a consumer electronics company. Almost all of their profits came from tacking on these very profitable warranties to every purchase.  Apparently, customers caught on because Circuit City has since joined the scrap heap of bankrupt retailers.

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Idea: Why not have your students do a 15 minute webquest to search for situations when it might make sense to purchase an extended warranty?

Here’s a three articles to get you started:

• Digital Trends: Should you shell out for an extended warranty? We ask an expert.
• Today.com: Thinking about buying an extended warranty? Read this first.
• Dave Ramsey: Just say “No” to extended warranties!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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