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Nato Team Members: Team Members: Jamie Wicks Jamie Wicks Aldo Michel Aldo Michel Justin Tan Justin Tan Ken Poon Ken Poon.

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Presentation on theme: "Nato Team Members: Team Members: Jamie Wicks Jamie Wicks Aldo Michel Aldo Michel Justin Tan Justin Tan Ken Poon Ken Poon."— Presentation transcript:

1 Nato Team Members: Team Members: Jamie Wicks Jamie Wicks Aldo Michel Aldo Michel Justin Tan Justin Tan Ken Poon Ken Poon

2 Extended Warranty

3 Repair rates for 3- to 4-year-old products Product Repair rate Laptop computer 43% Refrigerator: side-by-side, with icemaker and dispenser 37 Rider mower 32 Lawn tractor 31 Desktop computer 31 Washing machine (front-loading) 29 Self-propelled mower 28 Vacuum cleaner (canister) 23 Washing machine (top-loading) 22 Dishwasher21 Refrigerator: top- and bottom-freezer, w/ icemaker 20 Gas range 20 Wall oven (electric) 19 Push mower (gas) 18 Cooktop (gas) 17 Microwave oven (over-the-range) 17 Clothes dryer 15 Camcorder (digital) 13 Vacuum cleaner (upright) 13 Refrigerator: top- and bottom-freezer, no icemaker 12 Range (electric) 11 Cooktop (electric) 11 Digital camera 10 TV: 30- to 36-inch direct view 8 TV: 25- to 27-inch direct view 6 Source: Consumer Reports National Research Center, 2006 Product Reliability Survey

4 How much? This holiday season, shoppers spent $1.6 billion on extended warranties for laptops, flat-screen TVs, other electronics, and appliances This holiday season, shoppers spent $1.6 billion on extended warranties for laptops, flat-screen TVs, other electronics, and appliances

5 WHAT IS NOT COVERED This Plan does not cover damage caused by: This Plan does not cover damage caused by: accidental or intentional physical impact, misuse or abuse accidental or intentional physical impact, misuse or abuse fire, spilled liquids, battery leakage, exposure to weather, earthquake or Act of God fire, spilled liquids, battery leakage, exposure to weather, earthquake or Act of God failure to provide manufacturers recommended maintenance or to operate in accordance with manufacturers instructions failure to provide manufacturers recommended maintenance or to operate in accordance with manufacturers instructions improper use or failure of any electrical source (including without limitation power surge) improper use or failure of any electrical source (including without limitation power surge) Source: Staples Source: Staples

6 Profit I The margins on extended warranties are in the range of 50 to 60%. The margins on extended warranties are in the range of 50 to 60%. This means that 50 cents out of every dollar goes to the retailer and 50 cents goes to the insurance company who actually insures the product. Of that 50 cents, 30 cents goes to pay claims and 20 cents is to administer the transaction and provide the insurer with a profit. This means that 50 cents out of every dollar goes to the retailer and 50 cents goes to the insurance company who actually insures the product. Of that 50 cents, 30 cents goes to pay claims and 20 cents is to administer the transaction and provide the insurer with a profit.

7 Profit II In a Business Week article published in 2005 the magazine, using numbers from company reports and industry sources, estimated that extended warranties, accounted for all of Circuit City's profits and 45% of Best Buy's income. (Best Buy Co. is the largest consumer electronics retailer in Canada and owns the Best Buy and Futureshop chains.) In a Business Week article published in 2005 the magazine, using numbers from company reports and industry sources, estimated that extended warranties, accounted for all of Circuit City's profits and 45% of Best Buy's income. (Best Buy Co. is the largest consumer electronics retailer in Canada and owns the Best Buy and Futureshop chains.)

8 Profit Graph

9 Dell Inc. Product Warranty Claims Extended Warranty Revenue in $ millions per Quarter Blue Extended Warranty Red Product Warranty Source: Warranty Week from SEC data

10 Why bother?? If you bought the camera with Visa or a similar payment method, you also get another year of warranty free from them. If you bought the camera with Visa or a similar payment method, you also get another year of warranty free from them. Why does Visa give you such a "generous" offer? Because it doesn't cost them much to provide it, since very few gadgets have defects that show up after one year, but before two years. Why does Visa give you such a "generous" offer? Because it doesn't cost them much to provide it, since very few gadgets have defects that show up after one year, but before two years.

11 Things you are betting on the extended warranty Future Shop will still be in business. Future Shop will still be in business. You will have not lost your receipt. You will have not lost your receipt. You have not broken it. You have not broken it. You have not lost it. You have not lost it. and it will break between one and four years from now. and it will break between one and four years from now.

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13 Typical Repair Rates and Service Plan Prices for 12 Types of Consumer Products Product Consumer Repair Consumer Repair Service Plan Service Plan Price Quote Price Range Laptop computer Laptop computer$325 $69 - $200 Refrigerator: side-by-side, with Refrigerator: side-by-side, with $255 $50 - $200 icemaker and dispenser icemaker and dispenser Lawn tractor Lawn tractor$255 $130 - $300 Desktop computer Desktop computer$275 $60 - $160 Washing machine (front loading) Washing machine (front loading)$300 $50 - $130 Self-propelled mower Self-propelled mower$125 $40 - $70 Vacuum cleaner (canister) Vacuum cleaner (canister)$70 $30 - $52.50 Washing machine (top-loading) Washing machine (top-loading)$200 $50 - $130 Dishwasher$185 Refrigerator: top- and bottom- Refrigerator: top- and bottom- $225 $50 - $120 freezer, with icemaker freezer, with icemaker Gas range Gas range$225 $50 - $80 Plasma TV Plasma TV$650 $200 - $400 Source: NEW Customer Service Companies Inc.

14 Exceptions I In Consumer Report magazine's January 2005 issue, the consumer protection organization lists two consumer electronic products where buying an extended warranty might make sense: In Consumer Report magazine's January 2005 issue, the consumer protection organization lists two consumer electronic products where buying an extended warranty might make sense: Apple computer Apple computer plasma televisions and plasma televisions and laptop computers. laptop computers. It is because these products have a higher rate of failure and/or can be very expensive to repair. It is because these products have a higher rate of failure and/or can be very expensive to repair.

15 Exceptions II According to the magazine, the repair rate for laptops is 33% during the first three years of ownership. Interestingly the repair rate for desktop PC's was higher than laptops at 37% but repair costs are much lower. According to the magazine, the repair rate for laptops is 33% during the first three years of ownership. Interestingly the repair rate for desktop PC's was higher than laptops at 37% but repair costs are much lower. Projection televisions had a three year repair rate of 16%, camcorders at 11%, digital camera's at 8% and Direct View televisions at 5 to 7%. Projection televisions had a three year repair rate of 16%, camcorders at 11%, digital camera's at 8% and Direct View televisions at 5 to 7%.

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17 How to beat ‘electronic deflation’? According to Moore’s Law, the processing power of computer chips will double approximately every 18 months. According to Moore’s Law, the processing power of computer chips will double approximately every 18 months. Buy an MP3 player + 2 year extended warranty. Buy an MP3 player + 2 year extended warranty. Break MP3 player when Future Shop runs out of these players. Break MP3 player when Future Shop runs out of these players. Ask if you can fix it, and wait for few weeks to exchange it for the same player. Ask if you can fix it, and wait for few weeks to exchange it for the same player. You already know they have no more of them so you wander around and go back to the customer service desk with the new one you want. You already know they have no more of them so you wander around and go back to the customer service desk with the new one you want.

18 How to beat ‘electronic deflation’? (Con’t) Now you get to exchange your broken one for a new MP3 player equal to the value of the broken MP3 player when you bought it. You can pay for the difference if the new one cost more. Now you get to exchange your broken one for a new MP3 player equal to the value of the broken MP3 player when you bought it. You can pay for the difference if the new one cost more. If you exchange it within a year, you can even transfer the remaining time on your extended warranty to the new player. If you exchange it within a year, you can even transfer the remaining time on your extended warranty to the new player. Now, you can keep the value of the MP3 player for 2 years, with the extended warranty. You can save the price difference of the MP3 player caused by ‘electronic deflation’. Now, you can keep the value of the MP3 player for 2 years, with the extended warranty. You can save the price difference of the MP3 player caused by ‘electronic deflation’.

19 References Digitalhome Digitalhome &id=110&Itemid=34 &id=110&Itemid=34 Excalibur----York University’s Newspaper id=1246&Itemid=2 Excalibur----York University’s Newspaper id=1246&Itemid=2 id=1246&Itemid=2 id=1246&Itemid=2 Staples Staples =services_esp =services_esp Warranty Week Warranty Week

20 END


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