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Motivation for the Question: I just bought a very lightly used 2017 dealer's demo model, with, of course, only a limited factory warranty left on it. I was surprised at how insistent the dealer was that I should get an extended warranty. It took about five refusals on my part (all polite) for him to drop the subject.

Moreover, for nearly a year, I have been plagued by robo-calls on my cell phone trying to sell me an extended warranty on my older car, now totalled.

Curious, I listened to one of these calls all the way through and pressed the button to talk to a human. They were charging over $6,000 for a five or six year extended warranty (EW). (Can't remember exactly.)

EWs seem to be big business, and profitable.

I am not asking whether the EW is worth the cost; that depends on how long you keep a car, where your car falls on the normal distribution for cars of its age and type, your tolerance for possibly unexpected repair bills, and so on.

My question is: How much of that $6,000 plus goes to the salesman and his company? Is the answer fairly independent of the company selling the EW?

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    Re "over $6,000 for a five or six year extended warranty", that's twice what I paid for the car :-) Like the robocalls that say "your car's warranty is about to expire" when the car's ~15 years old... – jamesqf Jun 16 at 17:35
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Based on my experience being in sales (talking with salesman and managers, reading trade mags, etc.), as well as my personal experience selling technology extended warranties (a stain on my soul, and the worst task I was required to perform to keep a retail sales job):

Most of the time, about 40-80% of a 3rd party warranty's consumer-facing cost is paid to the company doing the selling as opposed to servicing the warranty (the "service" for most companies involved in this business is avoiding having to provide a service at all). The amount paid to the worker trying to convince you to make the purchase ranges from nearly $0 (for non-commissioned employees), to 10-50% of the company's cut.

In cars, my salesman acquaintance told me that for an extended warranty the spiff (incentive provided to whoever could make the sale) would be $500-$1200, depending on the cost of the warranty and if you were working for new or used cars. He complained that sometimes the sale of the warranty was more important than the sale of the whole car, because the profit on the warranty was higher both for the dealership and for his own paycheck! He told me of managers giving sales speeches that said if you don't sell a warranty, its hardly even worth selling the car, and of back-office games where sales managers offered discounts on the sales price to cover the cost of a warranty because then the manager got a bigger commission and the salesman got less. Sometimes they would run competitions that was based only on warranty closing percentage, not on amount of cars sold (of course if you didn't sell enough cars per month you would be fired).

In technology warranties, the world is remarkably consistent. In some companies, there is no spiff - no commission. In places that have it, a sale of a warranty costing ~$250 to the customer had a margin of 0.5 (cost to the company selling it of $125), and would give the employee registering the sale a payment of $20-$40 (the company liked to sometimes run double-spiff competition periods, and changed the totals every few months it seemed). The percentages per warranty were not consistent percentages - I was never sure why.

As for all the people trying to make you buy something you don't want, based on my old sales training being asked to make the sale 5 times would be considered a medium-low level of sales pressure. Some of the old sales training manuals insisted that if you weren't told "no" 7 times, you should not accept no as the final answer.

My old retail company often circulated memos to us pointing out that warranties were the highest margin (most profitable) item for sale in our entire store. If you did not ask every customer if they wanted one, for every single eligible item (once while you helped them on the floor, and again at the register - even if they said no earlier), you would be told this was a fire-able offense (most managers preferred a 3-strikes written warning system), and it was the minimum expected of you as an employee. Dedicated sales associates were expected to ask more, it was suggested you recommend them personally as a good deal, and "success stories" were circulated regularly - and occasionally just made-up.

Finally, in terms of consistency, the main consistency is just the same sort of market forces that use to suggest 100% gross markup for retail items as a rule of thumb (this was before high-volume low-margin stores ate so much of the retail market). As the companies selling these sorts of things have had their margins squeezed, they look for higher margin items to grow their profits. Too high a margin and it would be constrained by other competitive forces, too low and they aren't worth pushing on people.

  • Mon Dieu!!!!!!! – ab2 Jun 16 at 22:36
  • If someone asked me even just a few times, they would lose the sale. No means no. :) Sadly, technology is so poorly made (to last) today that you might get lucky if you buy such an EW. However, as you also said, they seem to try to avoid paying out as much as possible so be prepared for a fight. Haha. Though I will say the only time I've done an EW (on my own through a third-party), which was for a camera, I did end up needing it and it was no questions asked pretty much. They repaired the camera for free. – topshot Jun 17 at 13:17
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How much of that $6,000 plus goes to the salesman and his company? Is the answer fairly independent of the company selling the EW?

That is the big mystery. The consensus of financial advisors and consumer advisors is that extended warranties are generally not worth the price. That means that a significant portion of the fee is profit, which makes the money available for commissions significant.

I don't know of any jurisdiction that forces the seller of the extended warranty to provide a true breakdown of the warranty fee. In the case of the warranty being sold at the dealership, that is made even more complicated by the local and national aspect of the warranty. Some dealerships toss in oil changes or car washes as part of the deal.

Once that initial opportunity goes by, the phone calls, letters, and emails get started, in those cases it isn't 100% clear which are ripoffs and which are scams. So it would be even harder to know the commission structure.

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