Extended service contracts: When and why do people buy them?

Jun 15, 2009

Consumer experts have long recommended against buying Extended Service Contracts (ESCs) with products, since they are rarely cost effective. A new study in the Journal of Consumer Research examines the reasons why so many people ignore the experts' advice.

Authors Tao Chen (University of Maryland, College Park), Ajay Kalra (Rice University), and Baohong Sun (Carnegie Mellon University) used purchase data from the electronics department of a retail chain to examine who buys the extended service contracts and what factors drive their decisions.

"The first finding is that the type of product category matters," write the authors. "Consumers are more prone to buying ESCs for hedonic (pleasure-related) products such as game controllers than for utilitarian products like printers." The authors suggest that hedonic products hold more value than utilitarian products and consumers may expect to keep hedonic products longer. "The pain of potential loss is higher for hedonic products, making insuring the product more attractive," the authors write.

Price promotions also play a role in service contract purchases. For example, when consumers discover an unadvertised price promotion after coming to a store, they are more likely to use the unexpected savings to buy service contracts.

The researchers also discovered that low-income consumers are more likely to buy Extended Service Contracts than wealthier customers. "This is probably because poorer consumers cannot afford to replace the product if it breaks down," write the authors. "Poorer consumers are also more likely than rich to use money saved from promotions to buy the ESCs," the authors add.

The authors did not find that gender affected the rate of purchase for service contracts. But they did find differences between men's and women's reasons for buying them. "Men are much more sensitive to the costs involved in replacing the product in case it breaks down," write the authors. "There may be some truth to the stereotype of men being responsible for repairing gadgets; and therefore they are more willing to buy ESCs to avoid the hassle."

Source: University of Chicago Press Journals

Explore further: Satire has a history of informing during times of crisis

add to favorites email to friend print save as pdf

Related Stories

Recommended for you

Is this the year you join the one percent?

2 hours ago

Here's some good news for the New Year: According to new research by Washington University in St. Louis and Cornell University, there's a 1 in 9 chance that a typical American will hit the jackpot and join ...

Satire has a history of informing during times of crisis

12 hours ago

Just as only the jester can tell the King the truth, satire performs a vital function in democratic society by using humor to broach taboo subjects, especially in times of crisis, according to a book by Penn State researchers.

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

Doug_Huffman
not rated yet Jun 16, 2009
Why? Like playing the lottery, "ya can't fix stupid."

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.