In a moment of weakness after my furnance broke down I bought a service contract. Now every few months I get a "free cleaning" during which the furnace repair guy tells me about all the other products I need.
The salesman, sorry, I mean furnace repair guy, seems honest and genuinely concerned about my ambient body temperature. Of course, I never listen to him or buy anything and this makes me very happy. See, I figure that most people do purchase additional services from such a fine young man. If so, then perhaps the real purpose of selling the insurance contract is not the insurance- it’s to get the salesman in your door several times a year. And that means that the insurance qua insurance contract ought to be reasonably priced, maybe even under-priced, or at least not jacked up as high as it would be if it didn’t lead to further sales.
Thus, I have cleverly reasoned my way out of foolishness and towards brilliance - such reasoning is to be distrusted. Nevertheless, I wonder whether the argument does not generalize.
You’re talking about loss leaders, of course. These things are common in the sale of finished goods. Surely it’s quite plausible to use a service as a loss leader?
Similarly, the expertise you get in expensive stores (the good ones, at least) is underpriced ($0.00), in order to get you to buy other, expensive things.
The argument doesn’t necessarily generalize – surely it depends on the price of the insurance.
There is a consumer electronics chain here in the UK which makes most of it’s money by selling insurance that is generally of shorter duration than the MTBF of the goods they sell.
Home owners insurance is another example. Friends who work for a major insurance company have told me that they have taekn losses for decades on home owners insurance. They make their money on life insurance, especially whole life insurance. Therefore if you don’t but this you are doing well.
You are basically wasting your time letting him in to clean, after wasting your money buying the contract. Modern gas and oil burners need to be cleaned, at most, annually. You can usually go a decade without cleaning either without problems. I clean my own annually to look for potential problems before they become real problems (in 5 years since I moved in here I haven’t found any new problems with my gas heaters, though I had to replace the thermocouple on my water heater once).
Credit cards don’t charge the convenience card customer but they charge thestore, which invisibly adds it on to your sale price. Unfortunately customers pay that addition whether they use a card or not. That’s why particularly credit-worthy customers get a 1% rebate on many cards. That still leaves 0.8% or so of an immense number for the interbanks.
-dk
I suspect the business model in question for service contracts is not the ‘loss leader’. It is, rather, a method for sorting potential customers. It is known that people don’t seek out service contracts, they are sold by a salesman. Therefore, ceteris paribus, people who buy service contracts are more susceptible to sales pressure. If I am a sales company trying to determine who to have my people call on, buying a list of folks who bought ‘service contracts’ would be a great place to start.
It is also known that the hardest part of door-to-door sales is the ‘foot in the door’ – the hook that allows the salesman to make his pitch. If a guy showed up at your door to sell furnace accoutriments, you wouldn’t give him the time of day. If he shows up to ‘clean’ your furnace as part of a ‘service’ contract, you will listen to his accoutriment pitch. This procedure of sending a guy by on a quarterly basis just combines these stylized facts of sales into one sales-generation scheme.
(In other words, by buying the service contract, you signalled that you are a potential sucker. The wise salesman always exploits his small supply of suckers.)
I think that the insurance seems lower because they want you to feel that they are providing a service for free or close to it. They are trying to get a man in the door to tell you whats wrong and what you need, and trying to convince you to buy more than you need or dont even need. Good that you dont buy anything form him, he’s just there to do the job you alreday bought and there is no need to buy more.
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