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Extended warranties: consumer and manufacturer perceptions.

Researchers for years have been interested in the differing perceptions consumers and manufacturers hold toward express warranties (Kelley 1986). Consumers view express warranty coverage as a legal means of seeking redress if a product performs poorly and/or fails completely (Feldman 1976). Conversely, many manufacturers view express warranties as promotional tools and as an alternative to price competition (Koten 1984). Strategically, some manufacturers view express warranties as promotional tools and as an alternative to price competition (Koten 1984). Strategically, some manufacturers have begun to rely on express warranty coverage as the basis for developing a competitive advantage. For example, U.S. automakers in recent years upgraded coverage they provide on the power trains of domestically produced cars in an effort to differentiate themselves and boost market share (Levin and Guiles 1987; Singer 1987). While positive overall, improvements made to express warranties cast into doubt the benefits and value consumers receive from another increasingly popular form of warranty coverage, extended warranties.

Extended warranties are purchased by consumers and cover parts, as well as possibly labor, for a period beyond the duration of the express warranty. Their popularity is well documented. Plotkin (1985), for example, reported that between 33 and 50 percent of all new car buyers purchase extended warranties. Moreover, while there are perhaps only 20 major automobile manufacturers that market their products in the United States, over 250 firms are involved in selling extended warranties on new cars (Day and Fox 1985).

The purpose of this article is to contribute to the emerging knowledge base on extended warranties. Specifically, and following a review of the relevant warranty literature, several exploratory research propositions are field tested. Managerial and public policy implications are then explored. Finally, limitations of the present study and directions for research are highlighted.


Express warranties have been extensively studied by scholars since the passage of the Magnuson-Moss Act (Kelley 1986). This literature, together with the extended warranty research conducted to date, provides insights to scholars interested in further studying extended warranties. One stream of research has found that consumers: (1) view Magnuson-Moss Act warranties as the same or worse than pre-Act warranties (McDaniel and Rao 1982); and (2) may be willing to pay for better warranty protection (Rao and Weinrauch 1976). These results suggest consumers may turn to extended warranties as a way of compensating for insufficient express warranty protection. Unfortunately, some extended warranties include exclusions, are subject to the interpretation of the warrantor, fail to cover repairs due to normal wear and tear, and duplicate coverage provided in the express warranty (Rigg 1986; Silber 1983).

A second stream of research has focused on the use of express warranties as signals of product reliability information (Gerner and Bryant 1981; Kelley 1988; Wiener 1985). While manufacturers certainly communicate with consumers through extended warranties, their role in signaling has not yet been investigated. A third research stream has focused on the ability of express warranties to reduce consumers' perceived risk (Armstrong, Kendall, and Russ 1975; Bearden and Shimp 1982; Shimp and Bearden 1982). Given the findings in this area, purchase of an extended warranty may in part be motivated by the desire to reduce risk. In this respect, evidence exists that suggests lower income, lower education, and larger family demographic clusters may purchase more extended warranties in an effort to reduce financial and performance risk (Center for Policy Alternatives 1978).

Finally, economic considerations appear to play a role when consumers evaluate extended warranties. Consumers may not buy extended warranties because they are viewed as a means by which sellers (manufacturers, retailers, or independent insurance companies) generate revenue (Day and Fox 1985). Evidence also suggests consumers may purchase more extended warranties as the price of the product increases (Kelley, Conant, and Brown 1988).


A cross-sectional study was undertaken with two separate samples, one manufacturer and one consumer. Although two distinct survey research instruments were developed, many of the same questions were asked of both groups to test for differences between the two groups. The distinguishing characteristics of each group, as well as the specific nature of each questionnaire, are overviewed separately.

Manufacturer Sample and Questionnaire

A survey research instrument was developed and mailed to the marketing vice presidents in 241 major household appliance manufacturing firms located throughout the United States. Major household appliance manufacturers were selected because of the large number of firms in the industry and the variety of products they market on which extended warranties are available. The mailing list was assembled based on information taken from the 1986 Thomas Register of American Manufacturers. Two weeks after the initial mailing, a second cover letter and questionnaire were sent to those manufacturers who had not responded.

A total of 79 responses were received. This represents an overall response rate of 33 percent. However, 12 of the surveys returned were incomplete. This left 67 for analysis and represented a usable response rate of 29 percent. Twenty-five percent of the respondents manufactured microwave ovens/stoves and ranges; 21.8 percent washing machines and/or clothes dryers; 18.7 percent refrigerators and/or freezers; 15.6 percent vacuum cleaners; 9.5 percent air conditioners; and 9.4 percent dishwashers.

To test for the presence of nonresponse bias, respondents and nonrespondents were compared on two variables that receive pervasive use in government and industry information systems, annual sales volume and type of product manufactured. A chi-square test indicated that no significant difference existed between respondents and nonrespondents on the basis of sales volume ([X.sup.2] = 1.47; df = 4; p < .35) or type of product ([X.sup.2] = 2.69; df = 5; p < .21).

The questionnaire was comprised of four major parts. Part One required that respondents answer an open-ended question on why extended warranties were, or were not, sold by the manufacturer. Part Two focused on a variety of issues related to the selling and buying of extended warranties. Part Three applied only to those manufacturers that offered extended warranties and concentrated on the specific nature of the manufacturer's extended warranty program. Part Four of the survey focused on the demographic characteristics of the manufacturer.

Part Two of the survey research instrument was comprised of ten items, each of which was related to one of the six extended warranty research propositions. Respondents were asked to evaluate each item on a Likert-type scale with values ranging from "1 = strongly agree to 7 = strongly disagree." Each of these items, as well as their corresponding research propositions, are presented in Table 1. Although multi-item scales of a Likert-type were not developed for all six propositions, it should be noted that several research propositions were partially evaluated on information generated by the open-ended questions included in Parts One and Three of the survey. In exploratory studies such as this, a balance between highly structured closed-ended and more flexible open-ended questions is both appropriate and justified (Campbell, Daft, and Hulin 1982; Van Maanen, Dabbs, and Faulkner 1982).

The reliability of the items were checked by coefficient alpha and split-half analyses. Coefficient alphas were .74 and .86 for the multi-item scales used to test Propositions 3a and 4, respectively. For the remaining scales, a split-half reliability analysis indicated no differences existed on any of the research propositions when the respondents were randomly assigned to two groups. Therefore, it was concluded that the scale items exhibited an acceptable level of reliability for an exploratory study.

Only manufacturers who indicated that they currently market extended warranties were asked to complete Part Three of the questionnaire. Specifically,


this group of respondents was asked about: (1) Effect extended warranties had on the image of their product and company; (2) Average price consumers paid for their extended warranty; (3) Percentage of their customers who purchased an extended warranty; and (4) Percentage of warranty work performed that was covered by an extended warranty.

Consumer Sample and Questionnaire

A total of 205 students enrolled in evening business classes at a large western university participated in this study. Located in a major, as well as fast growing, metropolitan area, the university's student body is somewhat atypical. Many are older than the average college student, work full- or part-time, and no longer live with their parents. Study participants possessed similar characteristics. Specifically, the median age of the respondents was 25 years, participant incomes averaged almost $22,000, and 17 percent of the respondents reported owning their homes. Ninety percent of the respondents were between 18 and 34 years old. Approximately equal numbers of males (52 percent) and females (48 percent) took part in the survey. Given these characteristics, the participants were thought to be an appropriate group to survey. Consumers who fit this profile are one of the major market segments for major household appliances and automobiles. For example, Simmons Market Research (1985) reports that major household appliance purchasers possess the following characteristics: 56 percent are female; 46.2 percent are between 18 and 34 years of age; 46.5 percent have some college experience; and 35 percent have household incomes of less than $25,000 per year. Therefore, respondents to the survey are, or soon will be, prime targets for extended warranties.

A cover letter and questionnaire were distributed to the consumer respondents in large groups. The cover letter explained that the purpose of the study was to explore and measure consumer perceptions of extended warranties. A short definition and example of an extended warranty were included in the cover letter. Upon completing the questionnaire, respondents were thanked for their participation.

The consumer questionnaire was comprised of four major parts. Part One asked participants to answer an open-ended question concerning whether, as well as why, an extended warranty had ever been purchased. Part Two of the consumer survey was identical to Part Two of the manufacturer survey. Part Three of the questionnaire applied only to those participants who indicated that they had bought an extended warranty within the last three years. Specific questions in this part of the survey asked consumer respondents to: (1) indicate whether teh extended warranty had been purchased at the same time the product was bought; and (2) evaluate the degree of satisfaction with extended warranty service, had it been received, on a scale which ranged from "1 = very satisfied to 5 = very dissatisfied." Part Four of the questionnaire focused on the demographic characteristics of the consumers.


Manufacturer Findings

Forty-two percent of the 67 manufacturers that responded to the mail survey indicated they currently market extended warranties. The remaining 39 manufacturers reported that extended warranties were not currently avaialbe on their products. Seventy-five percent of the manufacturers who market extended warranties reported that extended warranties enhanced the image of their product(s) and 54 percent indicated extended warranties enhanced the image of their company. The average price charged for an extended warranty was $65. Additionally, these same firms indicated that approximately nine percent of their customers purchase an extended warranty. Finally, an average of 13 percent of the warranty work these firms perform was completed under an extended warranty.

Responses to the open-ended question included in Part One of the survey provide insight into the reasons why extended warranties are marketed by some manufacturers and not by others. As one manufacturer noted, "We market extended warranties to provide the customer with full warranty coverage, as a response to customer desire, and to increase business revenue." Seventy-five percent of the manufacturers who currently market extended warranties indicated that extended warranties enhance the image of their products. Thirty-eight percent of this same group indicated they market extended warranties for the purpose of increasing firm revenue, a finding which provides some degree of support for Proposition 4. A smaller percentage of respondents also indicated that extended warranties are marketed to provide comprehensive customer service (25 percent), and as a response to competitive pressures (19 percent).

The manufacturers in this study who did not offer an extended warranty also provided explanations as to why they have refrained from marketing this increasingly popular form of product protection. Illustrative of the responses received was, "We consider our five-year warranty ample. The product is simple and some are still in use after 30 years." The most often cited reason for not marketing extended warranties, mentioned by 56 percent of the respondents, was that the express warranty coverage currently available on their products provided more than sufficient protection for the consumer. Other reasons cited were the low price of the product, which minimizes the benefits of repairs provided under an extended warranty (11 percent), and the high quality and dependability of the firm's product (11 percent).

Manufacturer Comparisons

A series of MANOVAs followed by Roy-Bargmann univariate step-down F-tests were used to test for differences in demographic characteristics as they relate to the exploratory research propositions. The demographic variables selected for analysis were marketer/nonmarketer of an extended warranty, firm size, and extended warranty service/no service provided. The analysis on the latter two variables included only those manufacturers that marketed extended warranties. The results of the analysis are presented in Table 2.

Overall, two of the MANOVAs were significant, including those for marketers/nonmarketers of extended warranties (F = 0.821; p [is less than or equal to] .046) and service/nonservice providers (F = 0.627; p [is less than or equal to] .081). The MANOVA was not significant for size of firm (F = 0.184; p [is less than or equal to] .407). However, some manufacturer support for Proposition 2 was established. Specifically, manufacturers who market extended warranties (X = 1.12; SD = 0.35) elicited stronger agreement than nonmarketers (X = 3.18; SD = 0.35) with the statement that extended warranties do offer the consumer extra protection. In addition, Proposition 3b was partially supported when marketers of extended warranties (X = 2.62; SD = 1.30) strongly agreed with the statement that companies offer extended warranties to enhance customer goodwill when compared to nonmarketers (X = 4.00; SD = 2.00).

Consumer Findings

One hundred seventy-two of the 205 consumer respondents (84 percent) involved in this study indicated that they had purchased a product within the last three years on which optional extended warranty coverage was available. Moreover, 47 percent of these participants (n = 81) indicated that they had purchased an extended warranty on this product within the same time fram. Overall, 51 percent


of the extended warranties purchased were on new cars, 29 percent on major household appliances, and the remaining 20 percent on miscellaneous products (e.g., vacuum cleaners, garage door openers, VCRs). All purchasers of extended warranties reported buying their extended warranty at the time the product was purchased and 38 percent had received service under the terms of the extended warranty.

Purchasers were asked to explain their reasons for buying an extended warranty in an open-ended question. A failry large number of purchasers (39 percent) indicated that they had bought an extended warranty believing it was cheaper than the cost of repairs they might potentially confront. The view that extended warranties provide additional protection was expressed by 33 percent of the purchasers, a finding that provides partial support for Proposition 2. As one respondent stated, "I purchased an extended warranty for added protection against breakdowns; excessive use of this product can reduce its life span." Finally, questions about product quality, in some cases based on previous experience with the specific brand, were cited as reasons for buying extended warranties by 11 percent of the respondents.

Consumer Comparisons

A series of MANOVAs followed by Roy-Bargmann univariate stepdown F-tests were again conducted to explore differences in the degree to which certain demographic characteristics might be related to the exploratory propositions. The demographic variables selected for analysis were purchase/nonpurchase, gender, service/no service received, and type of ptoduct purchased. The analysis on the latter three variables included only those respondents who had purchased an extended warranty. Several significant differences were found, results of which are presented in Table 3.

Propositions 1a, 1b, 2, 3a, and 4 all received partial support based on the consumer sample results. Most importantly, several differences existed between: (1) purchasers and nonpurchasers of an extended warranty (F = 0.882; p [is less than or equal to] .074); and (2) those purchasers that had an occasion to have a product serviced under an extended warranty versus those purchases that had not yet requested service (F = 0.683; p [is less than or equal to] .015). The MANOVA for gender (F = 0540; p [is less than or equal to] .271) and type of product purchased (F = 0.542; p [is less than or equal to] .286) were not sinificant. Purchasers were stronger in their agreement that: (1) manufacturers that offer extended warranties have limited their express warranty coverage (X = 2.58; SD = 1.32 for purchasers versus X = 3.31; SD = 1.55 for nonpurchasers); (2) consumer believe extended warranties signal product reliability (X = 6.15; SD = 1.73 for purchasers versus X = 7.15; SD = 1.61 for nonpurchasers); and (3) manufacturers market extended warranties to generate revenue and facilitate competitive differentiation (X = 13.14; SD = 1.56 for purchasers versus X = 14.18; SD = 1.18 for nonpurchasers).

A significant difference also existed between purchasers who had received service under terms of their extended warranty and those who had not yet exercisedd their service option on Propositions 1b, 2,


and 4. Those that had received service were stronger in their agreement that consumers find extended warranties difficult to interpret (X = 2.25; SD = 1.37 for service recipients versus X = 3.23; SD = 1.64 for those that have not yet received service). In addition, they strongly agreed that manufacturers market extended warranties to generate revenue and facilitate competitive differentiation (X = 8.00; SD = 1.29 for service recipients versus X = 13.84; SD = 2.56 for those that have not received service). However, consumers who had received service disagreed more strongly that extended warranties signal product reliability (X = 3.75; SD = 1.29 versus X = 2.80; SD = 1.16).

Actual levels of perceived satisfaction with services performed under terms of the extended warranty may in part explain the differences found. Those that had received service were asked to evaluate that service on a five-point scale in which the end points ranged from "1 = very satisfied to 5 = very dissatisfied." The extended warranty owners who had exercised their right to request service reported being only moderately satisfied overall (X = 2.48; SD = 1.01).

Consumer and Manufacturer Comparisons

To gain further insights into the marketing and purchasing of extended warranties, a MANOVA was performed to compare perceptions of consumers who purchased extended warranties and manufacturers that marketed extended warranties. An indepth analysis of these subsamples seems particularly appropriate. Consumers who have purchased and manufacturers who market extended warranties have first-hand experience with this increasingly popular form of product insurance. As a result, these respondents are probably the most capable and qualified when it comes to evaluating the scale items included in Part Two of the survey. Given that no significant differences existed on the six research propositions among those consumers who had purchased extended warranties on cars, major household appliances, and miscellaneous products (Table 3 column 4 for results of this analysis), the data were pooled for comparison with the manufacturer sample.

The MANOVA was significant (F = 0.827; p [is less than or equal to] .000), and results of the Roy-Bargmann univariate stepdown F-tests are presented in Table 4. Significant differences were found for five of the six propositions. Purchasers of extended warranties more strongly agreed


than did manufacturers that market extended warranties with the items that relate to Propositions 1a, 1b, 3a, and 4. More specifically, purchasers expressed support for the notion that manufacturers have limited their express warranties (F = 7.21; p [is less than or equal to] .018), consumers find extended warranties difficult to interpret (F = 10.24; p [is less than or equal to] .001), consumers buy extended warranties to reduce perceived risk (F = 7.77; p [is less than or equal to] .009), and manufacturers market extended warranties to generate revenue and facilitate competitive differentiation (F = 8.65; p [is less than or equal to] .003). While both purchasers and manufacturers agreed that extended warranties genuinely offer additional protection to the customer (Proposition 2), manufacturers' agreement was significantly stronger (F = 8.33; p [is less than or equal to] .004).


The results of this study, if corroborated by future research, have several implications for both marketing managers and public policy-makers. First, manufacturers that clearly communicate the terms and conditions of their extended warranties may be in a position to create a distinctive and substainable competitive advantage by simplifying the wording and encouraging consumers to read the extended warrantly before its purchaser. Consumers who understand what is, as well as what is not, covered under the terms of an extended warranty would be (1) less likely to become disappointed, and as a result, dissatisfied with a manufacturer's service policies and procedures; (2) more likely to speak favorably with friends and neighbors concerning a manufacturer's extended warranty; (3) less likely to waste a manufacturer's time and money asking, and perhaps arguing, that specific services be performed; and (4) more likely to purchase other products produced by the manufacturer, as well as possibly other extended warranties.

Although the results of this study are exploratory, they have implications for public policy-makers. It appears that public policy initiatives may be needed if manufacturers do not voluntarily improve and simplify the wording used in extended warranties. Currently, the Magnuson-Moss Warranty Act does not included explicit disclosure rules and wording guidelines for extended warranties. However, given increasing popularity of this new type of warranty coverage, coupled with the potential overlap that sometimes exists between express and extended warranties, the Federal Trade Commission may want to consider promulgating rules that address the nature, scope, and wording of extended warranties.


The major household appliance manufacturers who participated in this study represent only one set of manufacturers who might sell extended warranties. Automobile dealers, retailers, and third-party insurance carriers also market extended warranties. In addition, and although the consumer sample was believed to be representative of purchasers of extended warranties, some demographic groups (most notably the less educated, elderly, and upper income), were not heavily represented. Finally, the small sample size of the manufacturers requires that the results be interpreted with caution. To enhance the applicability of this study's conclusions, experiments and additional field studies are needed. Specifically, future research should (1) focus on other types of manufacturers; (2) consider examining the perceptions of retailers and third-party insurance firms that market extended warranties; (3) compare and contrast the perceptions of consumers from a greater distribution of age and income levels and geographic regions; and (4) improve on the scale development begun in this study.

Given the popularity of extended warranties among both consumers and manufacturers, it is hoped the results of this exploratory study stimulate additional research to address these and other questions related to the buying and marketing of extended warranties.


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Kelley, Craig A., Jeffrey S. Conant, and Jacqueline J. Brown (1988), "Extended Warranties: Retail Management and Public Policy Implications," in 1988 AMA Summer Marketing Educators' Proceedings, Gary Frazier, et al. (eds.), Chicago: American Marketing Association: 261-266.

Koten John (1984), "Aggressive Use of Warranties Is Benefiting Many Concerns," The Wall Street Journal (April 5): 33."

Levin, Doron P., and Melinda G. Guiles (1987), "GM Upgrades Power-Train Warranty on '87 Cars in Bid to Boost Market Share," The Wall Street Journal (January 23): 2.

McDaniel, Stephen W. and C. P. Rao (1982), "Consumer Attitudes Toward and Satisfaction with Warranties and Warranty Performance--Before and After Magnuson-Moss," Baylor Business Studies (November-January): 47-62.

Plotkin, Abe A. (1985), "A Long Look at Extended Warranties," Automotive News Extra--Marketing 86 (September 23): 30-32.

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Shimp, Terence A. and William O. Bearden (1982), "Warranty and Other Extrinsic Cue Effects on Consumers' Risk Perceptions," Journal of Consumer Research, 9(June): 38-46.

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Craig A. Kelley is Professor, Department of Management, California State University, Sacramento, CA; and Jeffrey S. Conant is Assistant Professor, Department of Marketing, Texas A&M University, College Station, TX.

The authors wish to thank two anonymous JCA reviewers for their guidance; Dennis Tootelian and Laurence Takeuchi of California State University, Sacramento; Michael Hutt of Arizona State University; and Paul Busch, Larry Gresham, A. Parasuraman, and Rajan Varadarajan of Texas A&M University for their helpful comments and suggestions.
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Author:Kelley, Craig A.; Conant, Jeffery S.
Publication:Journal of Consumer Affairs
Date:Jun 22, 1991
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