Saying No To Service Plans

By Jul 14, 2011, 9:04 AM Author's Blog  

I did a quick survey yesterday and counted 55 Web-capable devices – desktop, laptop, server and tablet computers, plus smartphones – in my life. Being a business owner, and a father of university students, means having to say “yes” to a lot of capital spending.

If we include printers, routers, Internet telephones, Slingboxes, televisions and various appliances, my gizmo census is way over 100. But I have zero service plans to cover all this malfunction-susceptible merchandise. Despite what many people assume, doing without service plans and extended warranties saves me significant money. That’s good, since I’ll soon need that money to buy another gadget.

If you doubt my math, take a look at Apple’s fabulously successful retail stores. Apple does not set sales quotas for store personnel, nor does it pay them commissions. But regardless of how many iPads, iPods and other assorted iDevices employees sell, those who fail to sign up enough customers for service plans get re-trained or moved to other positions. That tells you something about where Apple sees the profit potential in its stores.

The Wall Street Journal included this bit of Apple lore in a recent article headlined “Secrets From Apple’s Genius Bar: Full Loyalty, No Negativity.” The article focused on the lack of sales quotas for products, suggesting that the softer sell produced by such an incentive scheme may be part of the formula for Apple’s success. What caught my eye, however, was the part about how Apple pushes its sales force to move into high gear once they ask, “Do you want to add a service plan for that?”

When faced with that question, many people reflexively say yes. I always say no.

I reject service plans for the same reason retailers and manufacturers push them: In the long run, the plans cost consumers significantly more than they save.

Having so many machines means some of them are inevitably going to break. For those machines, having a service plan would pay off. Unless I find a crystal ball app for my iPhone, however, I can’t know in the check-out lane whether the fancy box under my arm will someday need an expensive repair. To be sure of covering the products that eventually break, I would have to get a service plan for every device I bought. With the risks of malfunction spread across a large number of items, the cost of buying service plans is almost guaranteed to be greater than the cost of necessary repairs.

If this were not true, the plans would be money-losers for retailers and manufacturers, who would promptly stop selling them.

Paying for a service plan is like putting a quarter in a slot machine. There is a chance you’ll win thousands of dollars. There is a much greater chance you’ll be out a quarter. If you play long enough, you’re bound to hit some jackpots, but you’ll probably still end up feeding in more coins than you get out. That is why casinos like slot machines and why I don’t play them.

Insurance plans also, on average, benefit insurance companies and not policyholders. But for most types of insurance, the potential expenses are so great that it is prudent to accept the high probability of a relatively small loss to avoid the less likely, but still possible, outcome of a very large loss resulting from a rare event. Since the risk of a house burning down is, for most people, financially intolerable, buying fire insurance makes sense. For me, and I suspect for most people, a broken computer or refrigerator or television is inconvenient, but not insurmountable.

In many cases, simple repairs can be made with the help of a book, website or YouTube video. At home and at work, I have saved a lot of time and money by opting for the do-it-yourself option. Once, my company bought a whole group of computers that turned out to be prone to hard drive failures after three or four years. To its credit, the manufacturer (MPC Corp., which went out of business in 2008) sent us a supply of replacement drives, so that when each machine malfunctioned, we were able to fix them ourselves.

When I do need to wait for a technician to come, or if I have to send a device away for repairs, I can usually find a spare lying around somewhere to use in the interim. I generally keep retired devices in storage for this purpose.

Of course, the fact that I have so many retired electronics points to another reason most of us are not devastated when an MP3 player or laptop fails to make it past the three- or four-year mark. In today’s world, we expect to replace electronics frequently, whether they break or not. Regular repairs may keep a computer running for 10 years, but no service plan can stop progress from making that 10-year-old computer obsolete. When you repair an old machine, you still have an old machine. Rather than pre-pay for such repairs by buying service plans, it makes more sense to save the money to buy replacements when something breaks and the repair would cost more than the older device is really worth.

These principles apply just as much to a typical home as to a growing business. Look around your kitchen. You probably see a refrigerator, microwave, range or stove top, oven, dishwasher, toaster and coffee maker. You may also have more esoteric devices, like an espresso machine. You can buy service plans for all these things.

There is a good chance that one of them is going to break before it should. The problem is that you don’t know in advance which item it will be. If you buy service plans for everything, you probably have already paid to repair or replace the device that ultimately breaks. If nothing breaks, you simply paid for nothing.

Manufacturing is a dog-eat-dog world of slim profit margins and intense competition. You might spend significant time and effort researching and choosing a new washing machine or computer, and you might shop around for a good deal. But how much time will you spend choosing a service plan, and how many competing products will you evaluate? Most likely, the answers are little and none.

That’s where sellers make a lot of their money and where you can misspend a lot of yours. I’m sorry for that eager and knowledgeable young person at the Apple store, but when that service plan comes up for discussion, I am still going to say no.

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