Optimal pricing policies for services with consideration of facility maintenance costs

Abstract

For survival and success, pricing is an essential issue for service firms. This article deals with the pricing strategies for services with substantial facility maintenance costs. For this purpose, a mathematical framework that incorporates service demand and facility deterioration is proposed to address the problem. The facility and customers constitute a service system driven by Poisson arrivals and exponential service times. A service demand with increasing price elasticity and a facility lifetime with strictly increasing failure rate are also adopted in modelling. By examining the bidirectional relationship between customer demand and facility deterioration in the profit model, the pricing policies of the service are investigated. Then analytical conditions of customer demand and facility lifetime are derived to achieve a unique optimal pricing policy. The comparative statics properties of the optimal policy are also explored. Finally, numerical examples are presented to illustrate the effects of parameter variations on the optimal pricing policy.

Keywords:

• service pricing
• facility maintenance
• Poisson process
• increasing price elasticity
• increasing failure rate

Acknowledgements

We wish to thank the reviewers for their valuable comments and suggestions. This research is supported in part by a grant (NSC 97-2628-E-011-001-MY3) from the National Science Council, Taiwan.