Won’t need? Don’t pay.


April 1, 2010

Kamya Jaiswal

Money Today , April 1, 2010

As they wrap the refrigerator for delivery, you can’t help feeling smug. For one, despite loud protests by the salesman, you wrangled a 10 per cent discount on the price. The extra-large freezer also seems a smart pick; after all you throw beer parties regularly. The extra Rs 2,500 for a three-year extended warranty is another good move. You won’t have to pay a rupee if some part goes in the next three years. What’s more, it is a fivestar refrigerator, so your annual electricity bills will be much lower.

Sounds like a good deal. In effect, it may not be so. Consider this: according to research by Consumer Reports, the odds of a refrigerator requiring repair in the first three years is just 8 per cent. Also, the price difference between a four-star and five-star refrigerator is about Rs 2,500, whereas the difference in the electricity consumed annually is only about 100 units. This means that the difference in your annual eletricity bills will be Rs 400 (at Rs 4 per unit). And you forgot that chilled beer can be stacked anywhere in a refrigerator.

Most people think they are value-conscious customers, especially in the case of big-ticket expenses like consumer durables. Yet, they fall into the trap of paying for services and features that they don’t need. Here’s how you can avoid doling out money for the unnecessary extras.

Ignore extended warranty

The biggest problem with this option is that you may never use it. The study by Consumer Reports says that in the first three years, the probability of a washing machine requiring repair is 22 per cent and a microwave, 12 per cent. Such products face problems either in the first year or after a long period of usage.

Says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy: "There are enough horror stories about service quality in the first year of warranty. How can one be sure that the service will be good during the extended warranty?" He also cautions against the fine print. For instance, you may have to lug the product to the service centre or if you shift to another city after buying the product, the extended warranty (also called annual maintenance charge) may no longer be free. Perhaps the biggest flaw in extended warranty is that it does not cover the expense of replacing a part. Mostly, it provides for free engineer visits and minor repairs only.

"This concept works in the West, where labour charges are very high, but in India, the services of an electrician are relatively cheap," says Dutta. Even if you call engineers from the brand’s service centre, they charge approximately Rs 250 a visit. This means that by paying Rs 2,500 for an extended warranty, you expect the appliance to break down at least 10 times in two years. Not practical is it?

Match energy efficiency with usage

Yes, energy-efficient products reduce your electricity bills.

However, the financial benefit is usually nullified by the premium you pay for the more efficient product. It takes seven years for a five-star, 1.5-tonne, split air conditioner (AC) to justify the additional cost over a four-star AC. By this time, you will probably be looking for a new one that is packed with more features and better technology.

How can you start reaping the dividends of a five-star AC from the first year itself? By using it every hour of every day. Of course, this also means that your electricity bill will be more than Rs 66,000 a year. This is not the usage pattern in most households. So before shelling out money for a more efficient appliance, ensure that the benefits are earned during its lifetime.

Buy what you need It is really a no-brainer: if you are not likely to use a particular feature, do not opt for the appliance, or choose a more basic model. Says Dutta: "The biggest issue with consumers is that they tend to buy products with more features than they need. There is value attached to these features, which increases the cost of the product."

So why not rein in the technophile in you? Don’t opt for a 10-kg washing machine if you have three members in the family. Check if the cooling technology with a fancy tag is any different from that offered by other brands. If this option doesn’t work for you, buy warm beer once in a while.

Reproduced from Money Today. Copyright 2010