Pricing Extended Warranty Contracts Considering Random Repair Costs and Time Value of Money

Extended warranty contracts have become an increasingly important source of revenue for manufacturing companies. These contracts represent agreements between manufacturers and customers, allowing the latter to receive maintenance and repair services beyond the standard warranty period in exchange for a predetermined fee. Typically, the contract fee is collected by the manufacturer upfront, while the costs associated with repairs and replacements occur at future time intervals. This study addresses the pricing of extended warranty contracts by considering both variable repair costs and the time value of money. Initially, the product failure process is modeled, treating the cost of repairing accidental failures as a random variable, and estimating the expected costs of addressing future failures. Subsequently, these costs are adjusted to account for temporal financial considerations, enabling the calculation of the total expected cost of the extended warranty. Incorporating the manufacturer’s desired profit margin, the appropriate selling price of the contract is determined. To demonstrate the practical application of the proposed methodology, a numerical example is presented, and the resulting pricing structure is analyzed. The findings provide valuable insights for manufacturers seeking to optimize warranty pricing strategies while accounting for uncertainty in repair costs and financial factors, contributing to improved revenue management and customer satisfaction.

کلیدواژه ها:

Extended warranty ، cost estimation ، Time value of money ، pricing