Mugged at the checkout: irrational add-ons at electrical appliance stores

Like other successful muggers, the retailers of electrical appliances know that surprise the key to taking money from people. As more of us research products on the Internet, it is harder for sales staff in these stores to mug us by telling us surprising things and using them to talk us into spending more than we intended. Often we may know as much as, if not more than, the salesperson does about which product best suits our needs and why, and who offers the best price.

But once we decide, say, which new television or digital video recorder to buy, we’re still not out of the woods: what we’ve just decided to buy is  an appliance that has to be hooked up to something else, and we’ve still got to pay for it. These are two areas in which the retailers can use the element of surprise to make us pay dearly.

If it’s part of a home entertainment system, our new electrical device will be useless without the connecting cable, but we probably forgot to research cables because we had quite enough on our minds dealing with whether we ought to be getting an LCD, Plasma, LED or 3D TV, what sort of energy efficiency rating we can live with without feeling guilty, how big a screen we really need, and so on. What should we do when presented with HDMI cables ranging in price from under $20 up to $300 by a salesperson who suggests that we should go for the top-end cable? Do we really risk losing the gain in picture quality we would otherwise get from hooking a Blu-Ray player to a $3000 state-of-the-art TV rather than an ordinary $1000 TV? In psychological terms, the extra cost of a premium cable tends to seem small relative to the extra cost of the premium TV. This is an obvious area for ‘framing effects’ to be at work.

If we don’t have an Internet-capable mobile phone to research the answer on the spot, or are too embarrassed to challenge the salesperson by doing so, we should defer buying a cable or buy the cheapest one. We should not give into pressure and buy a premium cable. Before coming to the store we had coolly invested our time in becoming informed shoppers.  If it was worth spending an hour on the Internet to save $200 on the TV, it is worth spending an hour to save $200 or more on the HDMI cable. If we buy a cheap cable and discover it is perfectly OK, we won’t need to make a second trip. Even if we were to discover a premium cable is worth having, we could order that online and still avoid making a second trip to the store or a few days of being unable to hook up our new toy.

In fact, if we took a coolly economical approach to the cable choice, we would soon discover that there is little point in buying a premium HDMI cable unless we need a very, very long one. Digital signals either transmit perfect or they are conspicuously broken up; there’s no half-way state of fuzzier images. (See this report. for example

Even if we do the economically rational thing about the cable choice, we may still fall at the final hurdle. Quite aside from the confusion that may be inflicted upon us if we consider using in-store credit, we will face the question ‘Do you wasn’t an extended warranty?’ This is a question we are asked repeatedly as modern consumers of appliances and the fact we get asked it so often should be a warning to us. The retailer is trying to sell us an insurance product each time this question is posed. But if we own lots of these products, and expect to continue to buy yet more as technology moves along, we should normally decline extended warranties. Some appliances will fail when just out of their normal warranty but most will last for years: you win some, you lose some, but if you have a good sample over the long term, then it pays to self-insure.

When an appliance fails, we should buy another with the money saved by not buying extended warranties.  We may also try taking it back to the retailer and pointing out that a ‘consumer durable’ is expected normally to last longer than the manufacturer’s voluntary warranty period and hence there is an ‘implied warranty’ under the Trade Practices Act. According to the Report of the Productivity Commission Inquiry into Australia’s Consumer Policy Framework, extended product warranties often offer little more than the ‘implied warranty’ obligations that manufacturers face.

On top of this, there are the problems that we may run into in getting our appliances fixed under their extended warranties. A third-party contractor, who stands to benefit from having the appliance come back for further work, typically does the appraisal and repair. Consequently, the problem may not be fixed efficiently or effectively the first time the appliance is sent for repairs. The warranty company, at arm’s length from the process can be duped by the contractor more readily than the owner would be if dealing directly with the contractor. This is because the owner can observe the symptoms directly rather than merely reading what the contractor has written on a report. Hence an opportunistic contractor will be much more conscious of the risk of losing repeat business from individual consumers (who may also spread adverse word-of-mouth reports to their social networks) than from warranty companies. The prices of the warranties will need to cover the higher repair costs experienced due to this principal-agent problem.

The trouble is, even if we know all this, we still have to stand firm in the face of the salesperson’s patter. The willingness of salespeople to back off when presented with the economics of the situation varies: some will give in graciously but with others there can be a hostile response as they attempt to prevent their patter from being derailed. In the latter situation just remember: if you tough it out for a few minutes and leave the store without buying the warrant you will probably save more than you can earn in an hour.

For those who aren’t confident about the legal side of implied warranties, it only makes economic sense to buy an extended warranty in a few special cases involving very occasional purchase of very expensive items. One is where consumers are elderly and unlikely to be buying many other expensive appliances during the rest of their lives. Another is where buyers do not have the financial reserves that would be necessary to pay for major repair or replacement costs without having to use high-interest extend credit facilities on their credit cards. Those who are risking bankruptcy by using extended credit on a big scale to purchase all the latest appliances with extended warranty cover don’t come into this second category: they would do better to hold off from buying some of the appliances as well as the extended warranties. By being patient for a year or two, they can save on interest and then benefit from the tendency of these kinds of products to fall in price as technology improves.

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