Two-dimensional base warranty design based on a new demand function considering heterogeneous usage rate

Abstract Warranties are prevalent in the market. The manufacturer of products sold with warranties often faces a problem of balancing a trade-off between warranty cost and boosted demand by warranties when designing the warranties. For a two-dimensional base warranty with both age limit and usage limit, the heterogeneous usage rate of customers not only has an effect on warranty cost but also differentiates customers’ perceptions on warranty period. For example, the high-usage customers are more concerned about the usage limit of the warranty period, while the low-usage customers are more preferred to a longer age limit. This paper defines an attractiveness index based on the available warranty region to describe the extent of attractiveness of a two-dimensional warranty period to customers with heterogeneous usage rate. Moreover, a demand function based on the attractiveness index is proposed to describe the boosted demand of extending the warranty period. From the perspective of the manufacturer, the optimal two-dimensional base warranty period is designed by maximising the expected profit considering the trade-off. Both numerical examples and a case study are presented to illustrate the application of the proposed method.