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Increase Attach Rates and Profitability through Flexible-Duration Extended Warranties

Wang, Ruxian; Ward, Julie; Gallego, Guillermo; Balestrieri, Filippo; Hu, Ming; Kayis, Enis; Beltran, Jose Luis; Jain, Shelen
HP Laboratories


Keyword(s): flexible duration, extended warranty, monthly care pack, flexible care pack

Abstract: Hardware trends in the personal computing industry adversely impact the sale of extended warranties. Steep declines in PC prices, including the introduction of new low-priced hardware categories like netbooks, make replacing one's PC an increasingly viable alternative to paying for repairs or buying an extended warranty. Frequent improvements in PC functionality further tilt the scales in favor of product replacement over warranty coverage or repair. This phenomenon is apparent in today's low attach rates for HP's low-priced consumer notebooks.

We propose offering flexible-duration support services that can appeal to a broader range of customers. Flexibility may be added to existing services in the form of monthly-billing with no long term commitment, or by making the existing paid-up-front services easier to cancel, with pro-rated refunds in the form of cash or "HP dollars" applicable to future purchases of HP hardware or services. This paper explores these alternate flexible service designs both from the perspective of the customer and provider. We present an analytical model of the customer' s dynamic optimal maintenance, replacement and coverage decisions under the objective of maximizing expected discounted product utility net of support costs. Unlike all previous work on flexible or renewable warranties, this model explicitly includes the customer's choice between replacing a failed product and repairing it. We also evaluate the total profit for the provider including hardware sales, extended warranty sales, and out-of-warranty repair. We show through a numerical study how flexible services can appeal to a broader market (in particular, frequent-upgraders or budget-constrained customers), can earn more profit for the provider, and can be designed to reduce customer attrition.

26 Pages

External Posting Dat: May 15, 2012 [Fulltext] Approved for External Public ation
Internal Posting Date: October 31, 2010 [Fulltext]

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