Laptops break, and laptops get dropped. So anybody writing a service contract has to expect some claims, and price accordingly.

As we continue our mystery shopping tour of the consumer electronics industry, we find the same baffling pricing patterns with laptops as we found with digital cameras, Blu-ray players, and flat screen televisions. Sometimes, the service contracts are very expensive, and sometimes they're great bargains. But the average price is close to the averages seen for other product categories.

Our shopping expedition this week began with a search for laptop computers at 18 major retail chains: Abt Electronics Inc., Amazon.com Inc., Best Buy Co. Inc., B&H Photo & Electronics Corp., BrandsMart USA, Costco Wholesale Corp., eBay Inc., hhgregg.com (Gregg Appliances Inc.), Micro Center (Micro Electronics Inc.), Newegg Inc., Office Depot Inc., PC Richard & Son, QVC Inc., Sam's Club, Sears Holdings Corp., Staples Inc., Target Corp., and Wal-Mart Stores Inc.

Service Contract Administrators

Over the course of going through the laptop computer offerings of 18 retailers, we came across eight different obligor/administrator/underwriter teams. SquareTrade was in Abt Electronics, Amazon.com, B&H Photo, Costco, eBay, Office Depot, QVC, Sam's Club, Staples, and Target. Its underwriter at all but eBay and QVC was Starr Indemnity & Liability Co. At eBay, however, SquareTrade's underwriter was CNA Warranty Services Inc., and at QVC it was Continental Casualty Co. Both are units of CNA Financial Corp. Service Net and AIG were at Best Buy and newegg.com. Warrantech, AMT Warranty and AmTrust Financial Services Inc. were at Amazon.com, BrandsMart USA, and hhgregg. Asurion and CNA Financial Corp. were at Amazon.com and Walmart. Micro Center had The Warranty Group. PC Richard and Sears had their own in-house service contract operations.

As in past weeks, we found that Amazon.com had a competitive mix of service contracts available from multiple administrator/underwriter teams, sometimes bidding against each other for the same laptop. This week, we found Asurion/The Warranty Group, SquareTrade/Starr Indemnity, and Warrantech/AmTrust selling laptop service contracts on Amazon.com. We have not yet found another retailer that sells multiple different brands of service contracts side by side.

At each retail website, we shopped for only three brands of laptops: HP, Dell, and Acer, because each had wide distribution across all types of retailers. We shopped only for new units, not refurbished, pre-owned, or open-box. And we shopped not so much for particular features, model numbers, screen sizes, or hardware configurations, but for price alone.

Unlike Blu-ray players and televisions, laptops are highly customizable, so it's incredibly easy to get lost in the maze if one tries to shop for the exact same model at multiple retail sites with the exact same configuration of processor, graphics board, hard drive, ports, and memory. So why not rely solely on brand and price?

Shopping on Price

Therefore, at each retail site, we shopped for Acer, Dell, or HP laptops selling for $300, $750, $1,250, and $2,500, or as close as possible to those specific price points. In some cases, especially for the high-end price points, we had to substitute Alienware gaming laptops for our preferred brands, but that company was acquired by Dell a decade ago, so it's really still only three brands in the mix. But in one case, at Sears, we had to shop for MSI (Micro-Star International Co. Ltd.) laptops at the higher price points, because they didn't stock any non-refurbished Acer, HP or Dell models selling for more than $400.

In a half dozen cases, specifically at Abt Electronics, BrandsMart USA, hhgregg, Sears, Target, and Walmart, we were unable to find any top-priced laptops for sale. Most of their offerings were priced at or below $1,000. This reduced the number of laptops surveyed at those retail sites, but as can be seen in Figure 1 below, there were plenty of others priced above $1,000 at other retail sites.

Altogether, we looked at 156 different pairings of laptops and service contracts. As Figure 1 illustrates, 50 laptops were priced below $500, 42 were priced between $500 and $1,000, and 64 were priced above $1,000. Within the highest-priced category, 38 were priced between $1,000 and $2,000, and 26 were priced above $2,000. None of the laptops we surveyed were priced higher than $2,600, although we did see some retailers offering super-high-end models priced up to $9,000.

Besides the laptop brand and price, the other metrics we collected were the service contract price and its duration in years. In Figure 2, it's clear that the most common durations were two and three years. But that's a fuzzy metric, because some of the service contracts began after the manufacturer's product warranty expired, while some enhanced the product warranty with protection against additional perils such as power surges, drops, and spills continuously from the date of purchase to the end of the contract, and covered break/fix from the date the product warranty expired onwards.

Two to Three Years Average

As can be seen in Figure 2, three-quarters of the laptop service contracts offered were for two or three years, while only 22 were for one year and only 17 were for four or five years.

The average price of the service contract across 156 pairings was just under 23%. But there was a tremendous amount of range between the bottom and the top. And while 58 laptop-contract pairings were above the average, that means almost a hundred were below 23%. And 28 were below 10%. Assuming those administrators are willing to pay claims, those would have to be bargains for all clumsy consumers.

Accidental Damage Protection

Speaking of drops and spills, Another metric that we collected completely out of curiosity was whether the laptop service contracts actually did cover accidental damage from handling, or ADH. To answer that question, in many cases we had to dig into the terms and conditions of the actual contracts, because the retailers weren't always clear whether they also covered accidental damage, or break/fix-only.

What we found was that only two-thirds of the service contracts we surveyed covered accidental damage. However, keep in mind that some retailers such as Abt Electronics, hhgregg, Micro Center, and QVC frequently offered competing plans with and without accidental damage protection, with a price difference between the two compensating for the reduced protection of the latter.

Only BrandsMart USA, eBay, and PC Richard did not offer any plans with accidental damage protection. The other 15 did in one form or another. So we can say that while most retailers offered it, some left the choice to the customer. And only three out of 18 retailers did not offer it at all.

Next we separated the 156 laptop-service contract pairings by the length of time they offered to cover the products. Some retailers offered one and only one duration. Some offered two or three. And some offered one or two with accidental damage protection and one or two without it.

We found five retailers offering one-year service contracts, which enhanced the manufacturers product warranties with additional coverages. They were backed by AIG, AmTrust, and The Warranty Group, and ranged in price from $35 to $210. All 22 of them are charted in Figure 3 below.

Given the prices of the laptops they were paired with, the price of these one-year plans ranged from 4% to 35% of the product they were protecting. Amazingly, the same company backed both extremes. At newegg.com, AIG offered to protect a $2,500 Acer laptop for $100, or 4%. And at Best Buy, AIG offered to protect a $317 Acer laptop for $110, or 35%.

In terms of the price of the service contract, those ranged from This made us wonder, are we measuring this price comparison the wrong way? Perhaps it's just as likely for a $2,500 laptop to break or be dropped as it is for a $317 laptop? And perhaps the cost of repairing or replacing said laptops is almost the same no matter what their selling prices?

So we calculated it a different way, just to see. We grouped all the service contracts for laptops selling for under $500, and calculated an average. Then we did the same for $500 to $100, $1,000 to $2,000, and over $2,000.

The results were illuminating. Of all the service contracts attached to laptops priced above $2,000, the average price of the protection plans was 10% of the product they were covering. For all the laptops priced between $1,000 and $2,000, the average service contract was 16% of the product price. For the laptops priced between $500 and $1,000, the average price was 24% of the product price. And the least expensive laptops had the most expensive service contracts of all, averaging 34% of the product price.

Then again, many retailers seem to base the price of the service contracts solely on the price of the product, with anything between $300 and $500 getting one price, and anything between $500 and $750 getting another, and so on. But most times they still list different prices for different lengths of coverage. For instance, two years might be $120 while three years is $180.

However, at the end of the day, we're not looking to discover how each administrator and underwriter design their price tiers for any given retailer's product line. We're looking to see how they compete, and how they price their coverage of the same product at different retailers. And we're wondering what is the average, what are the extreme highs and lows, and potentially, what might be the break-even price to protect a certain type of product for a variety of durations?

Two-Year Coverage

Back when we looked at televisions in the October 6 newsletter, we found that in general, SquareTrade had the lowest prices and Sears had the highest. With laptops, that's not as clear a trend. As can be seen in Figure 4 below, while nine of the 14 two-year service contracts priced below 10% of the laptop's price are administered by SquareTrade, and only one of the 10 priced above 30% are from Sears.

In fact, one of those most-expensive service contrasts is from SquareTrade. On a $170 Acer laptop at Target, SquareTrade wants $57 for a two-year protection plan. That's nearly 34% of the product price.

However, the highest-priced two-year service contract in this cohort is paired with the same hardware that topped the one-year contracts. At Best Buy, AIG offered to protect that same $317 Acer laptop for two years for $180. That's almost 57% of the laptop's price.

Still, the average was 19%, and as can be seen in Figure 4, there were quite a few service contracts priced under that percentage, covering a wide band of laptops. For instance, at the high end, there were six laptops selling at Best Buy, Micro Center, and Office Depot at prices between $1,250 and $2,450, but all of their two-year service contracts were priced between 11% and 24% ($280 to $330).

Note, however, that there are two Sears service contracts on this chart priced at exactly 20% of the product's price. This is the same pattern we saw with Blu-ray disc players, as was detailed in Figure 3 of the October 13 newsletter. Obviously, somebody at Sears believes 20% is the magic number. And indeed, it's just above the industry average.

Three-Year Service Contracts

There's another Sears service contract priced at 20% in the three-year service contract chart below. But there's another Sears protection agreement that's close to 55% ($210 for three years on a $384 Acer laptop). So unlike with Blu-ray players, not all of the Sears service contracts are at exactly 20%.

However, there's an even more expensive service contract in the chart below. It's that same $317 Acer Aspire that topped the list in Figures 3 and 4. This time, Best Buy and AIG are offering a three-year service contract for $250. That's nearly 79% of the purchase price of the laptop it protects.

Note that the average is 24%. And while SquareTrade does have several low-priced service contracts at the $100 mark, the rest of their offers are much closer to the middle of the pack.

Longer-Term Service Contracts

You can feel the risk rising as you get into the pricing of the four- and five-year laptop service contracts. In fact, less than half of these 17 offers include accidental damage protection, which in years four and five would be a significant peril for a laptop owner. Also, there's the question of fraud. Need a new laptop? Push the old one off the side of your desk.

We found only four retailers willing to write such long-term service contracts: Amazon.com and hhgregg (with AmTrust behind them), PC Richard (self-administered), and QVC (with SquareTrade and CNA behind them). Notably, none of the PC Richard or QVC offers, and only half of the hhgregg offers, included accidental damage protection.

That single solitary SquareTrade data point in Figure 6 was for a high-end $2,340 Alienware laptop that was paired with a $400 four-year service contract at QVC (which did not include ADH). In fact, only half of the 12 Alienware-service contract pairings we found at five different retailers offered accidental damage protection, even for a year or two. Is it because they're expensive and complex machines? Is it because they're fragile and costly to fix? Or is there another reason for this curiosity?

This phenomenon does not exist with Acer, HP, or Dell. Of the 64 laptop-service contract pairings where the laptops were priced above $1,000, 44 of them included ADH -- a ratio of nearly 69%. That's a slightly higher percentage than was found for the entire group of 156 (which was 67%).

Also, take another look at Figure 6. There are two offers between 80% and 100%. That's incredible. The highest of all is a four-year $200 service contract for a $220 HP laptop. Would anybody buy that? In second place is a $250 service contract for a $300 Dell laptop. And that one doesn't even cover accidental damage.

So while there are numerous service contract offers at or below 20% of the product price, there are also some that end up costing more than half as much as the product they protect. Consumers who can't do math in their head take heed: it pays to shop around as vigorously for the service contract as you do for the actual product, and get yourself a calculator.