Skipping extended warranties for electronics

There’s no upfront cost. The trade-off is that once the standard warranty expires, you’ll have to pay out-of-pocket for any repairs — though this scenario is relatively rare.

Extended warranties are usually priced at 10% to 50% of the original product cost. Industry estimates cited in research show average gross margins on these warranties range from 50% to 60%: for every 100 yuan in sales, sellers earn 50 to 60 yuan in profit, which is roughly 18 times the gross margin of standard consumer goods. In 2003, extended warranties accounted for just 3% to 4% of Best Buy’s total revenue, yet generated over 50% of its total profits (based on U.S. retail data from the 2000s). For warranties priced far below this benchmark, you can run the same calculation: warranty cost ÷ average repair cost = the minimum breakdown probability required to make the purchase worthwhile. You should only buy a warranty if you estimate the chance of a breakdown at least once during its term is higher than this calculated value. For example, if an extended warranty costs 25 yuan and the average repair cost for the item is 300 yuan, the probability of at least one breakdown during the warranty period must exceed roughly 8% for it to be a smart purchase. The 300 yuan figure here is just a hypothetical example, not an actual statistical value. Before doing this calculation, subtract the coverage period already guaranteed by national regulations: the statutory warranty period starts on the date of purchase, with a 1-year coverage period for the entire washing machine or refrigerator, and a 3-year coverage period for their major components. For washing machines, these major components include the motor, timer, control board, and capacitors; for refrigerators, they are the compressor and temperature control unit. Paying for an extended warranty during any period where it overlaps with the statutory warranty means you’re paying extra for coverage you’re already entitled to (national regulations, effective since 1995).

Chen T, Kalra A, Sun B (2009). Why Do Consumers Buy Extended Service Contracts? Journal of Consumer Research 36(4):611-623. https://doi.org/10.1086/605298；国家经贸委等 (1995). 部分商品修理更换退货责任规定（国经贸〔1995〕458 号，第八条三包有效期自开具发票之日起计算；附件《实施三包的部分商品目录（第一批）》洗衣机、家用电冰箱整机 1 年、主要部件 3 年）. 国家市场监督管理总局行政规范性文件. https://www.samr.gov.cn/zw/zfxxgk/zc/xzgfxwj/art/2019/art_f943e66de125437d92df701e1654c47c.html

That gross margin figure is an industry estimate cited by the paper from Business Week (2004), not something measured by this paper itself. The algorithm above applies to ordinary people who can afford a single repair fee. For those who rely on a single device for their livelihood and do not have a backup device, a separate calculation is required. Categories such as mobile phone screen crack insurance must also be calculated separately: first estimate how often you personally drop your phone, then see if the premium is worth it. For very cheap extended warranties, even if you buy them, you won't lose more than a few dozen yuan. Before buying, clearly check from which date the coverage begins: if it starts from the date of purchase, it overlaps with the 'Three Guarantees' (national warranty) during the first few years. Also, check whether the warranty is provided by the merchant, the brand, or a third-party company, and whether service fees and part replacement fees are charged separately. Flip through the manual and the warranty card as well, as the warranty period promised by the brand itself may be longer than the 'Three Guarantees'.