Determinants of extended warranty prices for consumer durables
| Published date | 21 November 2016 |
| DOI | https://doi.org/10.1108/JPBM-09-2015-0971 |
| Pages | 687-699 |
| Date | 21 November 2016 |
| Author | Hooman Estelami,Peter De Maeyer,Nicholas Estelami |
| Subject Matter | Marketing,Product management,Brand management/equity |
Determinants of extended warranty prices
for consumer durables
Hooman Estelami
Gabelli School of Business, Fordham University, New York, New York, USA
Peter De Maeyer
Department of Marketing, Mahidol University, Bangkok, Thailand, and
Nicholas Estelami
Department of Computer and Information Science, Fordham University, Bronx, New York, USA
Abstract
Purpose – Research in marketing has extensively examined the signaling effects of product warranties on consumer perceptions. Although this
stream of research has focused on initial product warranties offered by the manufacturer, studies of extended warranties, which protect consumers
against product breakdowns beyond the warranty constraints of the manufacturer, are relatively scarce. This paper aims to empirically establish the
effects of variables which influence the pricing of extended warranties for consumer durables.
Design/methodology/approach – Using data on over 8,000 product offers in six durable goods categories, drivers of the annual premiums for
extended warranties are empirically identified. Bivariate and multi-level hierarchical linear regression methods are used to establish the effectsof
factors which may drive the prices of extended warranties.
Findings – The results reveal that the standardized annual premiums for extended warranties systematically vary across product categories
and brands and are further affected by the retailer’s decision to use odd price endings for the sold product and the extended warranty. The
influences of warranty length and price level of the protected product on extended warranty premiums are also empirically established.
Research limitations/implications – The findings indicate systematic variations in extended warranty prices as a result of the factors studied.
Future research can extend this line of inquiry by utilizing alternative means of data gathering.
Practical implications – Given that marketers often cross-sell many consumer durable goods with extended warranty policies, and considering the
growth in consumer spending in this category, as well as the high retail margins associated with extended warranties, this paper contributes to the
understanding of the mechanism by which extended warranty prices are determined in the marketplace.
Originality/value – This is the first study to examine the determinants of extended warranty prices, as past studies have been normative and
non-empirical in nature.
Keywords Values, Retailing, Quality
Paper type Research paper
Introduction
A large volume of research in marketing has examined the
effects that warranty coverage can have on consumers’
product perceptions and purchase intentions for durable
goods. It has long been established that the presence of
warranty coverage reduces purchase risk both in perceived
(Shimp and Bearden, 1982;White and Truly, 1980) and
actual forms (Kelley, 1988;Weiner, 1985). Furthermore, the
numerous benefits that manufacturers can realize by offering
product warranties have been identified using both
prescriptive modeling and survey-based methods (Jiang and
Zhang, 2011;Padmanabhan and Rao, 1993). However, many
products fail after the manufacturer’s warranty period has
ended, and such failures can result in negatively charged
emotional reactions among consumers (Jain et al., 2007;
Lassar et al., 1998). To alleviate consumer hardship in such
contexts, consumers are growingly being pitched with offers of
extended warranties by retailers, manufacturers and third
parties. These are insurance contracts that protect consumers
against financial losses resulting from product breakdowns
after the manufacturer’s standard warranty has expired, and
some policies also expand on the coverage offered by the
manufacturer during the warranty period.
Despite growing consumer reliance on extended warranties,
and the high margins retailers exercise in cross-selling
extended warranties, the existing volume of research in
retailing has provided limited understanding of how this
unique category of service is priced in the marketplace.
Gaining such an understanding is consistent with long-held
research traditions in pricing literature. Past studies have been
conducted to help us better understand optimal pricing
strategies under different market conditions (Fergeson, 2014),
unique pricing practices applicable in consumer markets for
frequently purchased packaged goods (Danaher and Brodie,
2000), consumer electronics (Baye et al., 2004), real estate
(Thomas et al., 2010;Yavas and Yang, 1995), professional
The current issue and full text archive of this journal is available on
Emerald Insight at: www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
25/7 (2016) 687–699
© Emerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/JPBM-09-2015-0971]
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