Added Value, Warranties in 2005
The extended service plan business is thriving these days for a number of reasons. Clearly, with sales of new technologies on a steady rise, consumers seem to be more and more interested in knowing they won't have major problems if these products need repairs.
"We're seeing more and more sales of products like LCD TVs, DLP projectors and HDTV-compatible sets," says Bruce Wolfson, senior vice president of sales at VAC. "People are changing and updating their major electronics more often nowadays as the technology grows and changes. Even though these products are becoming less and less expensive, we're still seeing lots of contract sales—they're just working with shorter terms. The trend seems to be toward two to three year renewable contracts rather than five to six years."
According to research done by Businessweek Magazine last year, many nationwide chains are definitely appreciating the value of offering warranty services to their customers. The studies show profits from warranties accounted for all of Circuit City's operating income and almost half of Best Buy's. The research figures show that profit margins on extended service contracts are between 50 and 60 percent, which shows nearly 18 times the margin on the goods themselves. For example, a four-year contract on a $3,000 flat-panel TV costs about $400. Best Buy gives its insurers $160 and keeps $240 for itself.