A complimentary extended warranty: Profit analysis and pricing strategy

Abstract

This paper aims to investigate the emerging trend of a new warranty policy in industries, namely, complimentary extended warranty. For the warranty with complimentary extended service, customers can enjoy a free extended warranty if they register online before expiration of the base warranty. At present, with frequent technological innovations, customers are more willing to replace the product instead of repair, which makes traditional warranty less attractive. Since the warranty with complimentary extended service does not charge extra fees for the customers and the option of online registration is open to customers, it can attract a broad range of customers. Compared with traditional warranties, the proposed warranty provides flexibility for customers in their post-purchase choice of online registration. We develop a warranty model to investigate the popularity of the warranty. It turns out that the proposed warranty model exhibits advantages over the traditional warranties. The proposed warranty is profitable for risk averse customers and for products that heap benefits from customer information. We design and price the warranty for unit product when the customers have heterogeneous risk attitudes. In addition, we analyze the total profit and determine the optimal selling price considering the customer demand. Finally, a numerical example is presented to illustrate the effectiveness of the proposed warranty policy.