By: Laura Walton AFC®
It was the end of the year and I was getting my car serviced when the new service manager introduced himself and gave me some FIAT swag – a nice water bottle customized to fit the holder. Then he asked if I’d consider buying an extended warranty.
My car was just out of the manufacturer’s warranty. The argument was that there could be any number of repairs that would be covered and it would give me peace of mind…at a cost of about $1200 if memory serves.
Here’s the thing. I know better. Extended warranties are not considered a good financial decision. Here’s what Consumer Reports says about them after surveying 12,000 warranty holders:
Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375. Factoring those who didn’t use their policy, the median savings was zero. And that may have something to do with why satisfaction with automobile extended warranties is among the lower rated of all products and services surveyed by Consumer Reports, and why only about a quarter of respondents said they would definitely get it again.
But there was another element to this interaction. The gift of swag. It was a nice gesture on the part of the new guy and it made me want to return the kindness. I almost said “yes” to the extended warranty. In fact, I called Dave and he talked me down!
I realized later that I’d been caught up in the Principle of Reciprocity, that is, when someone gives you something, you naturally was to reciprocate. And, we often reciprocate with something of far greater value!
For example, studies show that when online retailers offer free shipping, 90% of us buy more than we had originally planned. Timeshare developers are brilliant at using this strategy – a free meal, show, or weekend and 60% of us buy a unit. Some of you will remember when the followers of Hare Krishna handed out carnations in airports to passersby. Wanting to acknowledge the kindness, hurried travelers reached in their pockets or handbags and responded with far more than the worth of the carnation.
The lesson is twofold: 1) extended warranties are often not the best financial decision, and 2) be careful to separate the financial decision from your emotional response – easier said than done.