The Persuasive Power of Warranties: the Effects of Competing Signals, Supporting Quality Information, and Need For Cognition

Citation:

Subimal Chatterjee, Timothy B. Heath, and Debi Prasad Mishra (2002) ,"The Persuasive Power of Warranties: the Effects of Competing Signals, Supporting Quality Information, and Need For Cognition", in AP - Asia Pacific Advances in Consumer Research Volume 5, eds. Ramizwick and Tu Ping, Valdosta, GA : Association for Consumer Research, Pages: 178-179.

Asia Pacific Advances in Consumer Research Volume 5, 2002      Pages 178-179

THE PERSUASIVE POWER OF WARRANTIES: THE EFFECTS OF COMPETING SIGNALS, SUPPORTING QUALITY INFORMATION, AND NEED FOR COGNITION

Subimal Chatterjee, Binghamton University, U.S.A.

Timothy B. Heath, Miami University, U.S.A.

Debi Prasad Mishra, Binghamton University, U.S.A.

EXTENDED ABSTRACT -

An important task for marketers is to demonstrate the quality of their products to consumers, quality that is often "unobservable" and otherwise difficult for consumers to ascertain. Sometimes marketers demonstrate product quality by direct action. For example, to break the perception that products made in China are inferior to imports, General Motors actively organizes factory tours conducting 500 potential customers a day through its Shanghai factory (Wall Street Journal, October 26, 1999; A18). At other times, marketers communicate product quality by messages. For example, to mitigate the American buyers’ worries about quality, Kia markets its Sedona minivan with a 10-year, 100,000-mile limited warranty (Los Angeles Times, Sep 5, 2001; G1). Kia’s warranty is a quality signal, i.e., information that is external to the product but often used by consumers to make inferences about its quality (Bloom and Reve, 1990).

The ability of warranties (and quality signals, in general) to credibly communicate quality, however, is likely to depend on at least three characteristics of the product-market. First, warranties should be more important in markets of experience (Nelson, 1970, 1974) and credence (Darby and Karni, 1973) products, compared to search products. The difficulty of evaluating the quality of experience and credence products means that buyers will have a difficult time telling the lower-quality and higher-quality sellers apart (markets with information asymmetry; Akerlof 1970). Thus, if buyers are unable to get supporting information about quality (e.g., recommendations from close friends), they are quite likely to use warranties as a signal of quality based on the belief that only higher-quality sellers can offer warranties (lower-quality sellers will not offer warranties since they risk losing credibility and money if consumers discover the true quality; Wernerfelt, 1988).

Second, the persuasive power of warranties should depend upon the nature of marketplace competition. When multiple sellers use different tactics to signal quality, consumers must decide which signals are more credible than others. Signals are perceived as "bonds" by customers (Ippolito, 1990) and their credibility is increased if customers believe that the bond is vulnerable, i.e., the marketer’s reputation, or revenues are at risk (Kirmani and Rao, 2000). Thus, a marketer offering a warranty risks losing future revenue if the quality of the service is not up to the mark. Another marketer offering a AAA-certification for the same service risks losing its reputation (and, perhaps, the certification itself) if the quality is insufficient. Thus, whether warranties are less effective or more effective than competing signals will depend upon the extent consumers understand and care about the bond that are being put at risk by the signals.

Finally, and third, warranties are likely to appeal more to the less-thoughtful consumers looking for decision shortcuts, as opposed to those who are more thoughtful (low versus high in need for cognition, or NFC; Cacioppo and Petty, 1982; Cacioppo, Petty, Kao, and Rodriguez, 1986). While lower-NFC consumers may be content to use warranties as a decision heuristic (e.g., when in doubt, select the service that offers a warranty), their higher-NFC counterparts are more likely to look for hard evidence of quality. The latter, therefore, should respond more favorably to signals that directly address the product’s quality (e.g., our product goes through a 13-step quality inspection process) compared to warranties (a signal that only compensates should something go wrong).

We investigate how warranties influence consumers’ choice of an automobile service in markets with limited or extended supporting information about quality, where multiple competitors send different quality signals, and consumers vary in their tendency to engage in thinking. One hundred and twenty two undergraduate students participated in an experiment where they imagine that they are shopping for a repair shop to do emergency transmission work on their car. They have a choice of two shops (A and B). Shop A offers a 12-month/12,000 mile warranty for labor and parts. Shop B signals quality either through a AAA certification (e.g., our services are certified by AAA of Southern New York), or by offering a free extra service (e.g., we perform a comprehensive maintenance inspection, free of charge, to determine whether other services are necessary as well). In the extended-supporting-information condition, the quality of work is comparable across Shops A and B, whereas in the limited-supporting-information condition, there is no information about the quality of repairs at the two shops. Participants report their intention to choose Shops A or B on a 9-point scale ranging from 1 (Definitely Shop A) to 9 (Definitely Shop B) with 5 (Indifferent between Shops A and B), and their assessment of their NFC (on the standard 18-item NFC scale; Cacioppo, Petty and Kao, 1984).

We ran an ANOVA with participants’ shopping intention as the dependent variable (transformed scale with higher numbers indicate greater preference for the shop promising a warranty), with competing signal (certification, free extra service), supporting information (extended, limited), and NFC (lower, higher) as the three predictors. We split participants into lower-NFC and higher-NFC groups based on a median split of their raw NFC scores.

The main effect of supporting information was significant. As expected, warranties are more persuasive under limited M=6.48) than extended supporting information (M=5.69; F_{(1, 121)}=4.77 p<0.05) and replicates the information asymmetry effects reported elsewhere in the signaling literature. The main effect of NFC was also significant. Warranties are more appealing to lower-NFC consumers (M=6.57) than their higher-NFC counterparts (M=5.56; F_{(1, 121)}=6.95 p<0.01), suggesting that warranties may serve as decision shortcuts for the lazy consumer. The main effect of NFC, however, was qualified by a NFC by competition interaction (F_{(1, 121)}=3.72, p=0.056). Explicating the interaction reveals that warranties are preferred equally by lower and higher-NFC consumers when pitted against certifications (M_Lower-NFC=6.44, M_Higher-NFC=6.06; t₅₉<1), but much less so by the higher-NFC consumers when pitted against the free extra service (M_Lower-NFC=6.68, M_Higher-NFC=4.92; t₅₉=3.13; p<0.01). The fact that warranties are preferred over certifications by all consumers, independent of NFC, suggests that consumers may be more concerned about risk-reduction (i.e., being compensated if something goes wrong) rather than the overall quality reputation of the service provider (reputation that is signaled by the certification). However, the finding that warranties are less persuasive than the free extra service offer among the higher-NFC consumers suggests that the latter may be more discerning in their assessment of market signals, favoring those that offer something concrete immediately (free extra service) over those that promise future compensation (warranties).

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