Strategic Price, Warranty and Profit Maximization Model of a Software Product Using Dynamic Optimization

Abstract

Technological advancements have affected each and every aspect of our day to day life. Over the last few decades our dependence on software products has increased immensely. At the same time, software technologies have been advancing at an electrifying pace to achieve new milestones. With this rapid development, competition between the developers is gaining new heights. In such a competitive business arena, customer satisfaction plays a vital role to decide on the survival of product in the market. So, it becomes essential for the firms to work on strategies of product portfolios to attract more customers in order to elevate profit levels. In this regard, firms are using different strategies to obtain a significant market share. An appropriate price becomes one of the most effective factors to influence customers demand. On the other hand, warranty length also acts as an attribute of quality and forms another factor that may sway the customer towards or away from the product. In a warranty contract, the seller or manufacturer promises for a free repair or renewal policy for failed products. In this paper, we have investigated the marketing and production problem for a software firm considering price and warranty as simultaneous dynamic decision variables under the condition of a dynamic demand. We have considered a demand function dependent upon price, warranty and cumulative sales. We have used optimal control theoretic approach for the proposed profit maximization model to derive optimal price and warranty policies. The results specify several optimal policies with which decision makers would gain insight into the consequence of their decisions. Further, genetic algorithm is used to find the optimal results. Numerical example is provided to illustrate the applicability of model.