Extended warranties are too expensive. Why are consumers so happy to buy them?

Photo: TVWall2 by justshufflingin (Flickr)

Did you know that extended warranties are often more profitable for retailers than the products the warranties are for? According to Business Week, profit margins on warranties are as high as 60% so they account for a disproportionate amount of retailer profits. (For Circuit City, before it went out of business, warranties apparently accounted for all of its profits.)

So it's clear why retailers try and power sell warranties. But why do we consumers continue to buy them and why are we prepared to pay a price so disconnected from the actual cost? We've been told for years that these things are a waste of money but we just don't listen.

Some insights into this question come from a new paper in the Journal of Consumer Research. The authors--Tao Chen, Ajay Kalra and Baohong Sun took a look at purchase data from an electronic retailer and they've concluded that the decision to buy a warranty depends a lot on the shopper's mood. Turns out that people are more likely to buy warranties on fun products (like flat screen TVs) than for functional products (like computers). The authors think that people buy warranties for the fun products because they care about them more and would feel a greater sense of loss if they broke and weren't covered. That means that the price we're prepared to pay for a warranty reflects our expected pleasure from the product purchased rather than from a rational assessment of whether it's likely to break or not, thus providing retailers their profit opportunity.

Any chance that retailers can wean themselves off these over-priced warranties? No. But they could and should do better and not exploit their customers failings. One way forward would be to add more value to warranties. The best example I could find is AppleCare. Rather than just a basic warranty coverage, Apple adds outstanding service and support from its experts. That adds value and it's a big hit with customers.

Meanwhile, when it comes to extended warranties, I'm just going to say "no," however happy I am with what I buy.

Remorseful Starbucks tries to revive the category it strangled half to death

The new Starbucks ad (wait, it's a 1985 Folgers ad, apparently). The real ad (aired on SNL) is here

Once, in America, there was a thriving instant coffee market. There were brands like Brim, Maxim and Sanka and manufacturers came up with fun, technical ways to differentiate themselves: Folgers had its crystals, Taster's Choice had its freeze-dried process. There was even Postum, a roasted grain coffee substitute. The coffee, to be honest, didn't taste that great but you could get used to it. It wasn't like unlimited refill, diner-style coffee or even coffee from the famous "Anthony's in Atlanta" was all that fantastic either.

Then, blowing in from Seattle, came the winds of change. Not only did Starbucks coffee taste better, but you got a whole third-place-experience thrown in too.

Those were cruel times for those (like me) working in the instant coffee business. We watched, aghast, helpless, as people changed their drinking habits and abandoned us. The average age of the dwindling instant coffee population kept going up and up and the shelf space allotted to us by supermarkets kept going down and down.

Now, after all hope should logically have been abandoned, it's Starbucks itself riding to the rescue. After a seven-month test, Starbucks is going national with VIA, its own instant coffee product. And it's giving the launch the full treatment. There's a TV campaign and taste challenges and it all adds up to what CEO Howard Schultz calls "the biggest investment that we've made in a national launch."

Who knows whether the launch will work? It seems unlikely but what's to say that there can't be an instant revival? It could be like the Mustang, leggings or Space Invaders.

For long-suffering instant coffee manufacturers, one thing's for sure. It's a chance and a lifeline. Time to get moving. It looks like at least one of the players is alive to the opportunity. Nestlé has already launched some (for them) aggressive comparison marketing. That's a start but, hopefully, they've got some new products in the works as well. Now that VIA is out there with a previously unimaginable price point (almost $1 per cup, 5x as expensive as a cup of Taster's Choice), there's all sorts of ways that they can come up with to deliver a better tasting product.

Good times for instant coffee may yet be rolling again.

Earlier Brand Mix posts about VIA:
1) Starbucks VIA instant coffee taste test. Is it as good as they say?: Where I confirm that VIA does live up to its claims that it tastes as good as Starbucks brewed product and ask the question: So what?
2) Taster's Choice welcomes Starbucks to the Hood: Where I report on Taster's Choice initial marketing response

Saver's remorse: Another reason to start spending

Watch out those of you who are ignoring our President's pleas and (voluntarily) cutting back on spending. You may feel pretty good about yourself right now but there's such a thing as saver's remorse to worry about.

John Tierney, in a The New York Times article called: "Oversaving, a Burden for Our Times" says saver's remorse is the regret about not buying things, the mirror opposite of buyer's remorse. Says Dr.Kivetz from Columbia University who has been researching this area: "People feel guilty about hedonism right afterwards, but as time passes the guilt dissipates. At some point there's a reversal, and what builds up is this wistful feeling of missing out on life's pleasures."

Some people so habitually prepare for the future rather than enjoy the present that they have earned a label: "Hyperopic" (the opposite of myopic). The good news is that this is a manageable condition and we marketers can help. Kivetz has shown that people will change their shopping behavior with a little prompting. When he asked shoppers to imagine how they would feel about their purchases in the distant future rather than the following week, they ended up spending more money and bought more indulgences like jewelry. (Without this prompting, they bought practical stuff like socks.) He had managed to shift the shoppers mindset and got them thinking more about saver's remorse than buyer's remorse.

In another experiment, and tapping into the fact that hyperopically-minded people often recognize that they have a problem, Kivetz explored ways to help them "precommit to indulgence." What he found is that if offered the choice between cash and "hedonic luxuries" like wine or vacations, the majority chose the luxuries even when cash was the better deal. One of the participants is quoted as saying: "If I took the cash , it would end up going into the rent." Whereas the offer of luxuries was forced pampering.

Has there been any marketing recently that's tapped into these behaviors? Is such an approach possible at the moment or do we need to wait a bit before we start imagining a brighter, more indulgent future?

Boomers quit spending, perhaps for good?

Photo: Jim Donnelly (Flickr)

Earlier this week, I predicted that the nation's resolve to stop shopping, which some see as a shift to more responsible shopping, won't last long. As soon as there is an economic recovery, it will be shop-'til-you-drop again.

Denise Lee Yohn (who has an excellent blog here) commented that she was already back to her "old drive-everywhere self" now that the price of gas has fallen from its record highs of last year. She also raised the issue of generations of consumers and that perhaps a "more socially-conscious generation that drives the trends today might be more committed to a scaled-back lifestyle than the repressed boomers who set the tone in the 80's."

That reminded that I'd seen something recently about boomer shopping behavior. I'm not sure what I read originally but this article from the Press-Telegram sums up the thought: "Baby Boomers have pumped up the global economy with their profligate ways for nearly two decades. It's been a great party. Now the music's over."

"Millions of Boomers," the article goes on to say "are realizing that 'hope I die before I get old' was just a sarcastic line in a rock and roll song, not a life plan." As Boomers hit their earnings peak right around the Millennium, the U.S. household saving rate went as low as 2 percent of income (from 10 percent during the early 1980s). Now the recession has probably provided an early wake-up call to this generation to change its ways.

Olivia Mitchell, a professor at the Wharton business school, commenting in the article says: "The Baby Boomers are going to have to work longer and eat less. And go back to what my mother was doing — saving string."