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The Importance Of Warranties Marketing Essay

Paper Type: Free Essay Subject: Marketing
Wordcount: 4061 words Published: 1st Jan 2015

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The importance of warranties can be explained from the economic studies that focus on the purpose of these legal contracts. Warranties may serve as signals of quality (Spence 1977), as insurance against variations in product performance (Heal 1977) or as incentive devices (Cooper-Ross 1985, 1988a, 1988b and Priest 1981).

Warranty is a legal obligation of the manufacturer or dealer who is liable to the consumers in case of failure of that product. It gives peace of mind to the consumer as well as confidence that the product would work well.(Anisur and Chattopadhyay 2004)

Magnusson-Moss warranty Act (1975) states that duration of lifetime warranty is a source of confusion because of difficulties in understanding life measures of coverage. In spite of complicacies in defining life, lifetime warranty has received a huge popularity in the product market as it guarantees a long reliable function of products.

Some of the issues related to warranties are discussed in details in Blischke and Murthy (Blischke and Murthy 1996), and Singpurwalla (Singpurwalla 1993).

A paper by AnisurRahman & Chattopadhyay (2004) explained the concept of lifetime warranty policies and looked into the complexities of modeling warranty costs associated with lifetime warranty policies. The paper also analyzed the potential of these policies if they could be applied in industries.

Some papers have examined the purchase of extended service contracts, which are essentially insurance products, for electronic products in a retail setting.While the impact of consumer characteristics (income, gender, and prior usage) on these insurance products purchase is also considered.(Chen, Karla &Sun 2001)

Literature on insurance identified determinants of purchase as being the probability of loss, the extent of loss, the insurance premium charged and buyer’s risk aversion (Mossin1968; Schlesinger 1999).

Chen, Karla &Sun’s (2001) study was the first attempt to examine consumers’purchase of extended service contract in a retail environment using field data.

Padmanabhanand Rao (1993) examined manufacturer warranty policies in a market characterized by the moral hazard problem and consumers with heterogeneous risk aversion.

Others investigated manufacturer strategies for extended service plans in the

presence of competition from third-party insurers.Lutz and Padmanabhan (1995) proposed that manufacturers should not offer extended warranties in this context because firstly they will have to consider the increased expected costs of both the basic warranty and the extended warranty and if consumers buy the extended warranty from the third-party insurers, they likely will reduce their maintenance effort in the product during the warranty period.

Day and Fox (1985) did a qualitative study and concluded that while general attitudes towards extended warranties are negative, consumers are more favorably inclined to extended warranties that provide insurance against catastrophic loss or those that provided regular maintenance.

Grossman (1998) studied the information role that warranties play and the additional information they provide about quality of the products. Whereas a paper by Balanchander (2001) explained that a longer warranty may be offered by a product with lower quality .They showed that in a market where a new product competes with an existing product ,signalling behavior leads to an outcome where the less reliable product may carry the longer warranty

However, Spence (1977) argued that a high-quality product might provide a longer warranty to signal its quality to uninformed buyers .

A paper by Welling (1989) explains that firms compete on the basis of price offered and refund policies and they base their prices on the quality of the products. consumers with high income levels tend to pay higher price for high quality products if the product risk is not insurable, with higher refunds if the product fails to meet expectations.

Consumers consider warranty as signals of product quality because they know that offering warranties are expensive for firms. Longer warranties increase consumers’ utility and increases the likelihood of product being chosen. Choi ( 2006)

If all insurers in a competitive insurance market are well informed of consumer risk types there is an increase in efficiency of market. however if the entrant does not know about the risk types there is less efficiency in the market. Strauss & Hollins (2007)

Boulding and Kirmani (1993) the warranty can, in effect, serve as a telling signal of the qualities of products carried by both firms, high bond credibility firm one which incurs a high cost if the signal is false, and low bond credibility firm, the one incurring

low costs as a result of false signal.

Warranty and product quality can be thought of as consistent with the use of warranty as a basis of judging quality of a product when consumer moral hazard is present. High quality can be signaled by a low quality. Lutz(1989)

Appliance warranties can be considered to provide a market signal of appliance reliability. However, the cost to consumers of obtaining enough information to interpret the signal causes the dispersion of warranty provisions to be limited. The more complicated the laws surrounding warranties, the greater the cost to consumers of warranty information. Gerner & Bryant (2006)

Consumer product warranties are prevalent in many markets. Consumer durables as well as some necessities and services are frequently sold in combination with kind of warranty. Emmons(1989)

Warranties serve as marketing device to extract consumer surplus if a product is offered with a variety of warranty contracts. However warranty contracts cannot be use as a device to maintain producer surplus because as service warranties may require a larger network of dealers which might be expensive to setup, in that case it serves as a barrier to entry of producers. Emmons(1989)

When products are sold with warranties, a linkage is created between buyer and seller. Because the seller’s future profitability is dependent upon the behavior of future consumers, warranties also imply a linkage between different cohorts of consumers. Bigelow, Cooper, & Ross(1993)

The growth of extended warranties have increased rapidly over the years. During 1980’s extended warranties were only offered on valuable items but now extended warranties. But now extended warranties are offered almost in all consumer electronics and domestic appliances ranging from laptops to simple sewing machines.( Kunpeng Li, Suman Mallik, Dilip Chhajed 2008)

The research topic would answer the question that what effect does extended warranty has on electronic goods. The research topic would also answer that does consumer purchase those brands more which have an extended warranty or sometimes they purchase those brands whose extended warranty may be less than other brands but they might just purchase it because they are brand loyal.

“Extended” warranties are called so because these warranties are more than the period offered by the initial manufacturer. Initially the warranty coverage is provided by the manufacturer. usually, when the warranty period is ended, the coverage of the extended warranty begins.. (Timothy l.schilling)

Most of the manufacturers offer extended warranties to the final consumer. For example GE appliances offers extended warranties to almost all of it’s products. There are some retailers who promote third party extended warranties they offer extended warranties at their stores in order to increase their sales. And they hire repairmen of technicians to cover up the service of the extended warranty. Warranties provided by the retailer are usually extended warranties, that means that they are warranty policy for a longer period. Warranties provided by the retailers are called service plan.

Many researches have been done on extended warranties and on warranties. The research paper has considered a few of these researches which talks about warranties without commitment to market participation. Warranties and adverse selection, product quality and warranties and the reputation of brands because of warranties.

A large number of the problems faced by consumers are related to warranties and refunds rights. When a manufacturer or a retailer sells a product with a warranty he is obligated to provide the required service to customer as stated in the warranty but some retailers would escape from this obligation in order to avoid company costs or would be committed to the warranty obligations but only as long as he wishes to sell or if he is forced by the law to honor these obligations. Most of the manufacturers would add an extended warranty to a product only to increase it’s value and gain consumers trust that a product is durable.

As defined by U Dinesh Kumar and Gopinath Chattopadhyay a warranty is a contractual obligation of a manufacturer/dealer associated with sale of a product.Under such contractual agreement a manufacturer/dealer takes the responsibility to rectify defects or failures of products due to design, manufacturing and quality assurance problems over a certain period of time after the sale.

To maintain the value of the warranty to the buyer, the seller must remain in business. Because the seller’s future profitability is dependent upon the behavior of future consumers, warranties also imply a linkage between different cohorts of consumers. (John Bigelow, Russell Cooper, Thomas W. Ross 1993). Throughout their research paper they have assumed that firms in order to stay active in the market the company have to be committed to their warranty obligations and treat consumers as their associates in order to gain future profits, retain existing customers and entice future customers.

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As said previously in the research that extended warranties are a means to augment the value of a product and entice consumers. Extended warranties can be a reason of increased sales of electronic goods due to this reason a lot of supermarkets and hypermarkets are willing to keep those electronic goods on their shelves which have an extended warranty. For retailers of products carrying extended warranties, the profits can be significant: Some analysts estimate that around half of operating profits for big consumer electronics chains come from sales of extended warranties. (Aidan Hollis 1999). Aiden in his research paper assumes that all consumers are similar in ways that they predict future value of a product, and they are risk averse which is what warranties value to them, and they are more willing to pay for those goods and services which are durable.

These assumptions are factual for electronic goods. Firms which are new in the industry in order to penetrate in the market will offer extended warranties in order to gain consumer’s confidence that they are a liable brand and also to make their brand identified by the customer’s. the product might not be of a good quality but the manufacturer will extend the product’s warranty in order to increase the value of the product. The warranty to be offered for a product is an important marketing decision. It was understood fairly early that a warranty possibly offers insurance against product failure to potential buyers (Heal 1977).

In this research paper we will evaluate what effect extended warranty will have on known brands and on unknown brands. Extended warranty works like an insurance to product.

Usually a less reliable product or a product with a lower quality has an extended warranty (Subramanian Balachander 2001), the researcher further concludes it in the paper that a longer warranty is more costly for entrants with lower reliability, adopting a longer warranty becomes a credible signal of quality. According to it’s research paper length of warranty and product quality is negatively correlated with each other. So consumer’s end up believing that new entrants who offer extended warranty has a lower reliability.

Usually manufacturers or retailers of a brand are benefitted when offering an extended warranty because if the product is failed the manufacturer will repair it rather than replace it and the cost of repairing the product is lesser. Consumers most of the time have this question in mind that is extended warranty really worth the price of a product.

Many consumers focus on new product developments and continually seek to upgrade their electronic goods and this affects how they purchase goods and how they respond when problems arise. In purchasing goods they are more likely to chase the latest features, which is inherently more risky because products with such features may only have been subject to limited testing. Also the experience of other consumers cannot be relied on as a good guide to the product’s quality and reliability. Not all models of a new product are necessarily as reliable as others and when the technology and products are new it is virtually impossible for consumers to collect the information they need to assess which product is likely to be the most reliable or suited to their needs. Qualitative research commissioned by CAV also noted that consumers pay little attention to warranties when they choose between products.

If consumers have difficulty judging the quality and longevity of goods at the time of purchase they are more likely to experience unexpected problems later on. In the case of expensive items such as flat panel TVs, consumers feel it is reasonable to expect them to perform satisfactorily for many years, and were very disappointed if defects emerged just after the manufacturer’s warranty expired. According the Consumers Union in the United States, rear-projection TVs are three times more likely to require repairs during the first few years of use, in comparison to other types of televisions. (Serres 2007)

If consumers are focussed on product improvements and upgrades and a problem does arise, they are more likely not to pursue their rights and to replace the problematic product with a new model. There is, therefore, a higher rate of replacement and a larger volume of devices not being repaired. This does not decrease the consumer detriment associated with product failure. Consumers are still angry and frustrated that the product has failed and they also face the cost of replacing the product. This behaviour does, however, reduce the pressure on traders to minimise warranty problems and improve their warranty and refund processes.

To compete in a market in which many consumers continually demand new, more technologically advanced products but at a cost at which regular updating is affordable, traders need to bring new products on stream quickly. This may limit the amount of product testing they can do. The need to keep costs low may also compromise quality control.

If few consumers focus on the product’s durability there may be few incentives for manufacturers to develop high-quality alternative products for those consumers who do want a device that lasts.

The market practices of traders can also affect the potential for consumers to make poor choices and later experience problems with the goods they purchase. While high pressure sales tactics is currently less of a feature of the electronics goods market than for some other markets, with the likely convergence of mobile phones, portable media players and handheld games consoles it seems probable that more sophisticated and complex advertising practices may emerge for converged devices

Harry F.griffin and Steven W.Simons has said in their research h paper published in 2005 that the extended warranty is specifically a contingent insurance policy that provides the certainty of coverage for a specified risk. Harry f.griffin and steven w. simons research paper is somewhat similar to this research paper they have compared one brands three year extended warranty with their observed prices and theoretic prices. Their research has used the black schole’s option pricing model according to the results they have evaluated that the three year extended warranty theoretic price is greater than the observed price, it is highly probable that other factors dominate the theoretic pricing factor such that consumers are willing to pay a positive insurance premium to purchase an extended warranty.

This research paper will compare the extended warranty of the brands which are familiar by the consumers which are the known brands and those products which consumers are unfamiliar of are the unknown brands. We will evaluate which brands consumers will prefer more the known brands with extended warranty or the unknown brands with extended warranty.

U Dinesh Kumar and Gopinath Chattopadhyay 2004, have used mathematical models for predicting the duration of extended warranty, they have developed a cost model for extended warranty which observed that under a minimal repair policy, the cost of extended warranty is high for integer values of the shape parameter.

As discussed earlier in the literature the extended warranty is more beneficial to the manufacturer or the retailer than the consumer. Many researchers have discussed this issue in their research papers. Some research papers have used extended service contracts in place of extended warranty elctronic manufacturers and retailers mainly rely on electronic service contracts as profit engines. (Tao chen 2007).

So it has become increasingly important for retailers to scrutinize how consumers respond to warranty pricing and assess how current pricing affects consumer purchase decisions. Tau chen has come up with these conclusion in his research paper that how current esc pricing can be improved. First, retailers should recognize that consumers strategically adjust their product adoption and ESC purchase decisions to coincide with future product and ESC prices. They also should understand the detrimental effect of fast declining product prices and product obsolescence on ESC sales. Second, because the ESC is the main variable under their direct control, retailers should acknowledge that their current declining ESC pricing does not align with consumer decision dynamics. Retailers could be better off by adopting an increasing intertemporal price discrimination strategy for ESCs.

Researchers have also observed extended warranties in supply chains. Extended warranty can be either offered by the retailer or the manufacturer. Some consumers extend the warranty from a third party for example the automobile manufacturer might give a warranty for a few years, the consumer buying that commodity can extend the warranty by getting it insured by the insurance company. These extended warranty usually works for automobile company. Sometimes it’s profitable for the manufacturer to offer a minimal extended warranty, this is possible in the case automobiles, the manufacturer can offer a minimal coverage warranty and the consumer can extend the warranty by getting the automobile insured. (Nancy A. Lutz and V. Padmanabhan 1995).

Nancy A. Lutz and V. Padmanabhan 1995 proposed that minimal extended warranty can be observed in homogenous markets. They further said that condition of insurance by an independent agent along with consumer moral hazard creates a significant negative externality on the warranty cost of the manufacturer. In these circumstances, it is feasible for the manufacturer to reduce the time period of the base warranty coverage of the product. .

Differences in consumers lead manufacturers to offer a warranty contract, usually implemented as a base warranty and a voluntary extended warranty. Consumers are different regarding the policy of the length of warranty but they are similar in other ways like for example they are risk averse, which is why some consumers value warranty, lastly they want an added value for their money.

Who ever offers the extended warranty decides the warranty policy and will incur the repair cost if the product fails. Some manufacturers offer less warranty than other retailers even though they know that consumer’s are risk-averse.

Thus the repair costs directly influences the provider’s extended warranty decisions, so in order to estimate the minimum supply chain cost the supply chain manager has to examine which is the least cost method the extended warranty through a retailer or an extended warranty through a manufacturer.

Most consumer electronics manufacturers, rather than retailers, voluntarily offer a standard one-year warranty. The manufacturer’s warranty is typically operated in partnership with the retailer.

Usually retailers will only offer a refund or an exchange if they are advised to do so by the manufacturer. In addition, some electronic goods manufacturers have implemented returns restrictions that prevent retailers from being able to accept returns or offer exchanges, replacements or credit notes for defective merchandise. For this reason, many department stores and mass merchandise retailers may have felt that they had to adopt.

Kunpeng Li, Suman Mallik,, Dilip Chhajed have used theoretical game theory model and have come up with a conclusion that in order to reduce supply chain cost the most optimized method is the extended warranty through a retailer and the retailer is also aware of the consumers demand so the most profitable method is extended warranty offered by the retailer.

Another supply chain model recognized by Kunpeng Li, Suman Mallik,, Dilip Chhajed 2008. Their research said that there are three models through which the product and the extended warranty is reached from the manufacturer to the final consumer. The three models tells the ways that the product can be reached from the manufacturer to the final consumer. The fist model tells that the product can be reached directly from the manufacturer to the consumer involving no intermediaries, and the extended warranty is also provided by the manufacturer. The second model proposed by him said that the product is reached from the manufacturer to the retailer and then to the final consumer, the extended warranty is provided by the retailer in this case and the extended warranty policy and decisions are also made by the retailer. The third models says that the product is passed from the manufacturer to the retailer in order to reach the final consumer. in the third model the manufacturer will make the extended warranty policy and decisions. These models were called the extended warranty policy models.

According to Kunpeng Li, Suman Mallik,, Dilip Chhajed 2008, the purpose of identifying these models was to evaluate the most cost effective method when the product and it’s warranty was reached from the manufacturer to the final consumer. Some manufacturers also involve a third party in their supply chain networks. These third parties when hired make the extended warranty policies and decisions.

All the researchers have agreed on to a common concept that warranties are provided in order to increase the consumer’s level of reliability about their products and in turn increase the company sales and profits. But do consumers value these extended warranties? According to research in the end both parties the manufacturer as well as the consumers is benefitted from the extended warranty.

Marieke Huysentruyt and Daniel Read 2008, research paper, examines on what basis do consumers give importance to the extended warranties. Their research findings tell that warranty purchase cannot be only recognized to an inclination to overvalue the cost and probability of product breakdown – in fact, their findings tell a probability neglect. their findings tell the best predictor of purchase decisions is the emotional benefits that consumers expect from a warranty.


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