Using performance-based warranties to influence consumer purchase decisions

Abstract

Traditional warranty analysis focuses on the reliability of a product and offers warranty designs that compensate a consumer if the item fails. We introduce the concept of a performance-based warranty (PBW) that guarantees that a product will operate at or above some baseline level of performance, such as a minimum energy efficiency for an appliance. We illustrate how consumer behavior can change in the presence of a PBW and define the parameters for which a manufacturer may increase revenue. Finally, we present an algorithm to solve for the optimal PBW design given a consumer’s belief about the expected performance of the product.

Additional information

Notes on contributors

Clay Koschnick

Clay Koschnick, Ph.D., is Assistant Professor of Systems Engineering at the Air Force Institute of Technology (AFIT). Prior to being assigned to AFIT as a faculty member, Koschnick served as an acquisitions officer in the United States Air Force managing the development and production of various aircraft and space systems. His research at AFIT focuses on engineering economics and cost estimating models for Department of Defense applications. Koschnick received his Ph.D. in industrial and systems engineering from the University of Florida, his M.S. in industrial and systems engineering from the Georgia Institute of Technology, and his B.S. in operations research from the United States Air Force Academy.

Joseph C. Hartman

Joseph C. Hartman, Ph.D., P.E., is Dean of the Francis College of Engineering at the University of Massachusetts Lowell. Founded in 1896 just outside of Boston and formerly known as the Lowell Technological Institute, the College serves nearly 4,000 engineering students. Hartman is also President and a Fellow of the Institute of Industrial and Systems Engineers. He previously served as Department Chair and Professor of industrial and systems engineering at the University of Florida and Department Chair and the Kledaras Endowed Chair at Lehigh University, as well as in visiting positions at the University of Edinburgh, Scotland, and the Fraunhofer Institute for Material Flow and Logistics in Dortmund, Germany. His research focuses on discrete optimization with applications in engineering economics and logistics, supported by numerous companies and agencies, including the National Science Foundation CAREER award. Hartman received his M.S. and Ph.D. in industrial and systems engineering from the Georgia Institute of Technology and his B.S. in general engineering from the University of Illinois at Urbana–Champaign.