Would You Like Some Risk with That? Willingness to Pay for the Extended Service Contract Warranty

Abstract The purpose of this paper was two-fold. First, we sought to examine and identify factors (from the consumer side) that drove willingness to pay (WTP) for extended service contract (ESC) warranties. Second, we identified levers from the manufacturers’ perspective, that managers could control, which might also affect WTP for these ESC warranties. To test our hypotheses, a series of experiments involving 927 participants was employed. First, a set of paired experiments focused on TVs and laptops were conducted. These experiments used the double-bound contingent valuation method to assess the influence of different aspects of the product and the sales pitch on WTP. Based on these findings, an additional experiment was conducted in which the hedonic/utilitarian nature of the same product was manipulated to further refine and verify the proposed mechanisms driving WTP. Overall, we found that while loss aversion drives the decision process, factors such as: whether the product is hedonic or utilitarian, the perceived brand equity, the price, and the regulatory focus of the warranty sales pitch, all influence how consumers decide to mitigate or avoid thinking about risk. Our findings suggest that consumers try to avoid risk and seek positive support for hedonic goods, while for utilitarian goods they actively assess risk, even when the product might be viewed as hedonic or utilitarian. This manuscript and its findings provide a solid conceptual framework from which to develop a more cohesive theoretical approach to understanding ESC warranties, and it also provides important insights to managers on how to enhance the profitability and attractiveness of their ESC offerings.