Rafi Mohammed

Are Buy Backs the Next Extended Warranties?

Posted on March 3th, 2011 (1 Comments)

First off, my sincere thanks to Small Business Trends for selecting The 1% Windfall as one of the top 10 business books of 2010.

Extended warranties are cash cows. With extended warranties accounting for 50 – 100% of electronic retailer profits, retailers are seeking similar products to inject much-needed profits into their bottom lines. Best Buy believes it has found this profit generator.

With a well-received Super Bowl commercial starring Ozzie Osbourne and Justin Bieber, Best Buy introduced its “Buy Back Program” The consumer desire this program seeks to serve is the “need” to own the latest technology. The program works in the following manner: at purchase, consumers have the option to pay a fee which entitles them to return the product to Best Buy in the next two years (four years for televisions) and receive a guaranteed percentage of their purchase price. The “refund” is in the form of a Best Buy credit, which will presumably be spent on an upgrade.  

Let’s examine the economics of this program. Consider this Samsung television that has been available for close to a year. Suppose that I bought this television a year ago for $800 - had the Buy Back Program been available, according to the pricing schedule it would have cost me an additional $99 to add this option. If returned I returned the TV today (6 – 12 months after purchase), I would receive a Buy Back credit of $320.

The key question is what’s the television actually worth? Amazon is selling used models for $528. Cha-ching. The gross profit on this exchange is $307: $99 (initial fee) plus $208 (spread between $528 retail price and $320 buy back credit). That’s a nice windfall.

This interesting program targets customers who want to effortlessly own the latest technology (they don’t have to sell old models on Craigslist etc.).  The only drawback I see is that while we all know that the electronics will be worth less a year from now, we may not want to confront this reality at purchase. As you are opening your wallet, how would you feel to learn (and agree) that in a year, the estimated value of the product you are purchasing will be 30 cents on the dollar?

Why not offer leases on electronics priced over, say, $2000, instead? “You can own this fabulous entertainment system for just $100 per month!” In The 1% Windfall, I cite a surprising statistic that 32% of import car buyers choose to lease and mention that a Texas Cadillac dealership claims that leasing used to account for 65% of its business. The financing aspect of leasing enables consumers to upgrade to better (and more profitable) products and the return option allows them to always enjoy the latest technology.  Also, since the focus is on the “low” monthly payment, less scrutiny is on the implicit depreciation.  

No matter what business you are in, offering customers add-on choices such as extended warranties, buy backs, and leases can reap cash cow windfalls.

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Readers' Comments on This Blog Entry

From Penny on July 1st, 2011
you can also lease handbags at Bags, Borrw and Steal.