Skipping extended warranties for electronics

Extended warranties typically cost 10% to 50% of the item’s original price. The profit margin on these warranties is roughly ten times higher than that of regular merchandise. In 2003, Best Buy in the U.S. earned over half of its total profits from extended warranties, even though they accounted for only 3% to 4% of its overall revenue. That price gap is exactly the extra money you end up paying.

There’s no upfront cost. The trade‑off is that after the warranty expires you’ll have to pay for any repairs yourself — though that scenario is relatively unlikely.

Extended warranties are priced at 10% to 50% of the product’s original cost. Industry estimates cited in research show that the average gross margin on these warranties sits at 50% to 60%: for every 100 dollars spent on a warranty, 50 to 60 dollars become pure profit. This is roughly 18 times higher than the gross margin on ordinary goods. In 2003, extended warranties made up just 3% to 4% of Best Buy’s revenue yet generated over 50% of its total profits (U.S. retail data from the early 2000s).

The gross‑margin figure comes from an industry estimate referenced in the paper (Business Week, 2004); it wasn’t measured directly by the authors. The calculations above apply to ordinary consumers who can afford a single repair bill. For people who rely on a single device and lack a backup, the calculation changes. Screen‑protection plans for phones must also be evaluated separately: first estimate how often you’re likely to drop the phone, then decide whether the premium is worth it.

Chen T, Kalra A, Sun B (2009). Why Do Consumers Buy Extended Service Contracts? Journal of Consumer Research 36(4):611-623. https://doi.org/10.1086/605298；国家经贸委等 (1995). 部分商品修理更换退货责任规定（国经贸〔1995〕458 号，第八条三包有效期自开具发票之日起计算；附件《实施三包的部分商品目录（第一批）》洗衣机、家用电冰箱整机 1 年、主要部件 3 年）. 国家市场监督管理总局行政规范性文件. https://www.samr.gov.cn/zw/zfxxgk/zc/xzgfxwj/art/2019/art_f943e66de125437d92df701e1654c47c.html