Will consumers pay more for PC World's extended warranties?

In the current economic depression it's no surprise that retailers have had to find new ways to attract and keep customers. A few years ago retailers only had to offer a low price and shoppers would swarm to new products. Now people are looking for more, and Dixons Retail (DR) - the owner of PC World, Currys Digital and Dixons.co.uk - is taking a punt that people will pay more for better service.

The company has launched a new service called Knowhow, which it promises will "take the anxiety out of buying technology products". Services on offer start with delivery and installation and move on to support, repairs and usage advice. All the company's large shops will have a Knowhow booth and there is a Sheffield-based call centre from which most services will be supplied.

Dixons Retail has invested a lot of money in Knowhow: 5,000 retail staff have been trained to offer basic in-store support with more than 600 around the country trained to expert level (although, what that means in practice is that they have attended a three-day training course).

Delivery staff will supply protective floor coverings when delivering large appliances and drivers have even been trained how to behave in customers' homes, although it's a pity that this type of training has to be provided in the first place.

This huge investment is going to have to be recouped, so how does Knowhow's pricing measure up? Some services are offered as a one-off, such as equipment setup. For example, setting up a laptop fairly comprehensively costs £30 in store or £60 at a customer's home.

For an anxious novice, that might be money well spent, particularly as DR says that staff will make sure people are shown how to get the best from their purchases. Setting up a home network setup with up to four devices such as PCs and games consoles attached is a quite competitive £90.

Subscription services
As well as the one-off services, Knowhow encompasses several ongoing extended warranty and hire schemes, from which most of the profits will probably come. Take the Infinity service, which provides a new computer every two years and Knowhow's "ultimate support and protection package".

This includes initial setup (if you live near a shop with a Knowhow centre) and phone advice 24 hours a day. What's more, when the computer is replaced, Dixons Retail will send you a cheque for 25 per cent of its original value. The monthly cost of Infinity is based on the price of the computer you want.

Let's say we buy a laptop for £500. The monthly payment is £45.65 so, at the end of the two-year minimum contract, we've spent £1,095.60. Subtracting the rebate (25 per cent of the original cost is £125), we've paid £970.60 for the laptop, or almost double its initial cost.

That extra £470 covers support and advice over two years, though that does seem a high price to pay for ‘peace of mind'. However, for new users unsure of what they're doing with their new computers, the 24-hour telephone support could well be worthwhile.

Knowhow's most extensive subscription plan is called Whatever Happens Premier, and its pricing initially feels a little like the old-fashioned style of extended warranty that was famously derided by the Office of Fair Trading for being unfair to consumers

In fairness, the Whatever Happens Premier package appears to offer far more than those old warranties did: it promises repairs, with a home visit if a problem can't be solved over the phone, an equivalent replacement if the item can't be fixed, "breakdown through mishaps" and worldwide protection.

The emphasis is on solving problems quickly, and that makes sense for both the company and the consumer. The faster Dixons Retail can solve issues, the less it costs, meaning that its profit on the fee is higher.

The cost of Whatever Happens Premier is also based on product price, so cover for our £500 laptop would cost £259 for three years, more than half the initial price. You can pay monthly but this is much more expensive in the long term: cover for our £500 laptop would cost £11.50 a month or £414 if the payments were made for three years.

Our verdict
The success of Knowhow will depend on how DR delivers the service. Some old extended warranties were aggressively mis-sold to the point where the law had to be changed to protect buyers, giving them the right to cancel after a cooling-off period. Dixons Retail insists that all store staff will be "advocates" of the KnowHow service - there's a fine line between pointing out benefits of after-sale service and hard-selling them. The corporate managers of PC World, Currys Digital and Dixons are advocating an approach that benefits the customer but store managers and staff under pressure to meet profitability targets may see the matter differently, particularly as the service matures and headquarters turns its eye to other projects.

Many people complained that some retailers were much more keen to sell warranties than to honour their promises. So part of the challenge for this insurance service is ensuring that staff maintain the high standard and the personal touch promised in the sales literature. If customers feel short-changed, word will spread.

Some Knowhow services look genuinely good value, while others could be valuable for people who need to take advantage of the technical advice. There are caveats - the "breakdown through mishaps" covers accidental damage, but the small print says it doesn't cover flood damage, neglect or misuse - who will decide whether specific damage is ‘accidental' or ‘misuse'?

But the basic principle of insurance services is that the majority of people will not need to call on them - that is how insurance companies make money. DR knows this is a valuable market - worth, according to trade publication Retail Week, £500m a year. Dixons Retail told Retail Week in May that it wants to take a £150m share of this. To do so it will have to deliver its promises.