What good are product warranties? Do longer warranties help you sell more upgrades? More homes? The answers may surprise you. By Matthew Power

A new house comes loaded with product warranties: 25 years for the roof, five years for the dishwasher, 10 years for the window seals. Even some caulking now carries a "lifetime" warranty. So when we asked builders to tell us how they use warranties to sell better products, we expected some shrewd sales tips. Instead, we encountered apathy.

"We've found that it really doesn't make that much difference to builders how long the product warranty is," notes Kelly Langhome, with Maytag's builder division. "So what we've done is started offering homeowner warranties. We suggest that [builders] use it as a closing tool, or mark it up and make a profit."

"In our market, the warranty we care about is the one-year homeowners' warranty," concurs Kim Roberson, a builder in Tulsa, Okla. "The buyers will never even look at the product warranties. What they want is the best cost per square foot. All those other details are simply not important."

But hold on. Why would manufacturers spend a small fortune to establish viable warranties if they mean nothing to consumers or builders? Other forms of promotion are much more cost effective. The answer: because they do mean something.

Hard evidence

"It's an incredible missed opportunity for builders," notes Joshua Wiener, marketing professor at Oklahoma State University. "There's overwhelming academic research, surveys, reports in the consumer press--all the way down to anecdotal reports--that say the same thing: Product warranties sell products. Purchase behavior is influenced by warranties. Buyers will pay a premium for a product with a better warranty. It's that simple."

In other words, builders who ignore product warranties leave money on the table by missing the chance to make higher margins on an upgraded product. At the same time, a product with a better warranty is almost certain to perform better, providing a built-in firewall against defect liability.

"If you buy a house with appliances that break, it doesn't matter whether the builder is directly responsible for them," Wiener notes. "The fact that he chose those appliances with those warranties means that the consumer is going to transfer that angst to the builder. He gets blamed."

Fast or fatal

Manufacturers, take note. Failure to respond quickly to collateral damages when warrantied products fail is a common gripe. On the flip side, a positive experience can cement a strong relationship.

Photo: Curtis Parker

"We had a problem with the GE refrigerator a while back that leaked when you first turned it on," notes Mike McMichael, a site supervisor in Lake Arrowhead, Calif. "It ruined some brand-new hardwood floors." "The damage was covered by warranty," he continues, "but we had to eat the cost initially while the manufacturer referred the case to the insurance company."

Kim Freeman, spokesperson for GE, says that the company does refer damage claims to an insurer, but that process should take no more than a couple days.

"We try to expedite builder claims," she says. "Of course, we have to send out a technician to check out the claim. But we try to deal with any builder problem right away, no matter how small."

Roberson had a similar experience with Jacuzzi whirlpool tubs.

"We had various mechanical failures, mostly with the pump systems," she says. "But trying to get them to fix it was a three-month wait. And we were afraid to work on them ourselves, because that might void the warranty. They would eventually come and fix them, but we lost a lot of time and money."

Gary Butcher, a Jacuzzi warranty agent in Salem, Va., attributes such complaints to the "middleman" in the warranty process. "I've dealt with a lot of companies, and Jacuzzi is one of the best in terms of their warranties," he says. "What often happens is that the builder hasn't tested the product before installing it and tiling it in place. By the time he discovers the problem, there's no access. It's in the warranty that you have to have access, plus all the paperwork has to be in order."

Wiener notes that many states now have lemon laws for automobiles--designed in part to address the same issue--getting big, market-dominating companies to honor their warranties more quickly. "If there's no competition, it's easy for companies to get complacent about their warranty service," says Wiener. "But they are beginning to recognize that it's not just do you fix it, it's how quickly you fix it."

"I would think companies serving builders would understand the needs of builders," Wiener adds, "and would have a different warranty process in place--and do something to meet the timing needs of builders. Maybe it's a chicken and egg thing. If builders are not paying attention to warranties, why should they pay attention to builders?"

Tried and true

Many companies do go the extra mile for builders. The reward: ongoing brand loyalty.

"Sears is wonderful," notes Roberson. "They respond quickly, and if they can't get an appliance part right away, for example, they'll jerk the whole stove out and replace it with a new one, rather than make you wait."

When product makers do take the high road when it comes to honoring their warranties, builders don't forget.

"We ordered some Milgard windows, but they came with the wrong size screens," notes McMichael. "So they sent down a crew who cut and fit custom screens for every window."

Photo: Curtis Parker

Warning bells

Of course, like consumers, builders must also be wary of warranties that sound too good to be true. "There are ways to spot bad warranties," notes Wiener. "If your gut reaction is, 'I don't know about this,' your gut is probably right."

"When I was researching warranties," he adds, "I found that the very best ones might go an extra year over their competitors. They might cover an extra few parts. Dishwashers, for example, are fascinating, because you can look through their parts list and see what's covered."

A red flag should go up when a manufacturer with a shaky reputation offers a better warranty than its competitors. Research has shown that consumers will get skittish in this scenario too. They can smell a rat. Don't disregard their concerns.

Finally, Wiener pulls no punches about the value of extended warranties. "Those are designed for one thing," he says, "to rip people off. They know that people are spooked when they buy an expensive item and are really risk averse. So they'll plop down another 20 bucks and get three more."

Playing the odds

Wiener notes that a better warranty is not a guarantee that a product will outperform its competitors. But the evidence suggests that products with top-shelf warranties will sell better, last longer, and protect your reputation better than those that don't make any promises.

"All of that fancy math the companies do comes down to one thing," he says. "How do we set our warranty to reflect our product reliability? For builders, it's a win-win situation."

The Fine Print

Though not required by law, when written warranties are provided with a product, they must meet certain requirements. On a product that costs more than $15, for example, the warranty must be available for reading before purchase. When comparing warranties, consider each of the following important provisions.

* Length of coverage: Which parts are covered for how long?

* Parts and labor covered: Are important parts excluded from coverage? Are you likely to get stuck paying labor costs?

* Repair versus replacement: Will a new item be provided if parts are not available?

* Location of repair: Does the product have to be transported to an authorized dealer or distributor?

* Consequential damage: If the product failure causes damage to other items in the home, will the damage be covered?

* Limitations: How easy would it be for a subcontractor (or the homeowner) to do something that accidentally voids the warranty, leaving you to pick up the pieces?

Do the Math

Manufacturers use sophisticated modeling to design warranties. Does it work?

The science of warranties is no seat-of-the pants affair. Warranties cost manufacturers money--somewhere between 1.5 percent and 3.0 percent of total sales.

The payoff is largest for new, or smaller manufacturers, says Joshua Wiener, marketing professor at Oklahoma State University, because good warranties allow them to signal a high-quality product. "A company like Maytag doesn't need a great warranty to sell products," he notes. "Everybody already knows it's high quality. But warranties allow a smaller company to compete on a quality basis."

A study done at Ohio University by Elizabeth Blair and Daniel Innis (see Research Sources) backs up his observation. The results indicated that "warranty length is most heavily weighted as a cue to quality when consumers are not highly knowledgeable and the brand name is not well known."

Numbers game: Manufacturers use complex formulas such as the one above to plan warranties. In the example, an item initially costing $1,000 has a failure rate of .5 per year. Each failure costs the maker $1,000. Without the warranty, the manufacturer would spend $2,500 marketing the item. With the warranty, however, the numbers are modified, because less marketing is necessary--making the optimal warranty length 2.5 years.

Source: "Some Economic Decision Problems in Warranty Problems," by Marlin Thomas, Purdue University, published in The Engineering Economist, 1999, Vol. 44, No. 2.

All or Nothing

According to research published in the Journal of Consumer Research (see Research Sources), when buyers look at innovative products, a moderate level of warranty has practically no value in reducing their sense of financial risk. Only a superior warranty encourages them to experiment with new products.

Hidden Protection

While most product warranties today come with written warranties, many states also enforce implied warranties. These include such verbiage as a "warranty of merchantability," requiring that a product must do what it is supposed to do. A dishwasher must wash dishes, for instance. Implied warranties offer a secondary line of defense when a company fails to honor its written warranty. Unlike warranties provided by the manufacturer, implied warranties cannot be "limited" by the fine print of the warranty document.

Back-Door Diplomacy

When a builder client has had a bad experience, the manufacturer's only path back to the selections book may depend on riding the coattails of a good retailer. A study published in the Journal of Consumer Psychology (see Research Sources) spells it out this way:

"Warranty is not used in judging product quality when a manufacturer with a poor reputation sells through a retailer with a poor reputation. However, when the same manufacturer sells through a reputed retailer, then the warranty is used in making quality evaluations."

Acid Test
Passage of the Magnuson-Moss Act in the 1970s made warranties more relevant.
Product No. of Manufacturers Included No. of Manufacturers Who: Additions* Exclusions**
Increased length of warranty No change in warranty Decreased length of warranty
19" color TV 13 0 4 9 0 0
12" color TV 12 4 8 0 0 0
Dishwashers 8 0 8 0 +5 0
Washing machines 13 0 8 5 -1 0
5,000 BTU air conditioners 10 0 10 0 +1 7
7,700 to 8,500 BTU air conditioners 8 1 6 1 +1 2
Automobiles 25 7 18 0 +4 0
*refers to additional parts/labor coverage
**refers to clauses exempting coverage for specific components
Source: "An Evaluation of the Magnuson-Moss Warranty and Federal Trade Commission Improvement Act of 1975," Joshua L. Wiener, Journal of Public Policy & Management, Vol. 7, pp. 65-82, 1988
Closing the gap: An examination of warranties after passage of the Magnuson-Moss Act in 1973 found that manufacturers quickly adjusted their warranties to better reflect product reliability. The pattern that emerges: Products that were not as reliable showed declines in warranty coverage. Brands with better reliability maintained stronger warranties. For example, warranty coverage declined for big TVs, washing machines, and small air conditioners, but increased for cars and dishwashers.

Research Sources

"Effect of Manufacturer Reputation, Retailer Reputation, and Product Warranty on Consumer Judgments of Product Quality: A Cue Diagnosticity Framework," Devavrat Purohit, Joydeep Srivastava, 2001, Journal of Consumer Psychology, 10 (3), pp. 123-134.

"The Effects of Product Knowledge on the Evaluation of Warranteed Brands," M. Elizabeth Blair and Daniel E. Innis, Ohio University. Psychology & Marketing, 1996, vol. 13, pp. 445-456.

"Warranty and Other Extrinsic Cue Effects on Consumers' Risk Perceptions," Terence A. Shimp and William O. Bearden, Journal of Consumer Research, June, 1982, Vol. 9., pp. 38-46.