Warranty Policy Impact on Net Revenues as a Function of Part Replacements and Optional Purchases

Publication Date



Warranty rebate policies which require that the customer return to the retailer for replacements may provide both costs and benefits to the retailer. These benefits could include purchase of upgrades, additional related products, snacks and merchandise from different parts of the store, which will be made while the customer is waiting for the replacement. These benefits have not been studied in depth as most articles on warranties have focused on minimizing replacement costs. Moreover, there are two types of replacement patterns which have not been compared in conjunction with costs of replacement and returns from additional sales generated by return to the store to utilize the warranty. These are the case of the product that gradually wears out (i.e. tires and batteries) versus the product has a high failure rate in the initial period and then after adjustments are made the subsequent periods show lower rates of deterioration. An example of this type of product may be TV sets, complex electronic components and cellular phones. Using simulations which include marginal revenues from original sales and warranty utilization as more visits are made to replace parts and revenue is gained from additional sales, marginal revenue from added sales increase in positive linear fashion. As the reimbursement rate increases mean net revenues per period decrease but by less than the reimbursement amount. Cut-off points can be set for expected mean net revenues using reimbursement decline rates and varying amounts of marginal revenue. Two different types of failure rates are compared, initially high failure as in electronic devices versus gradually increasing failure rates as a function of age. Initially high rates of failure in conjunction with marginal revenues from additional purchase that are greater than zero and initial losses that are low may be more lucrative than average revenues from gradually increasing wear out replacements. Moreover, minimal levels of additional purchases, initial loss in value and rate reduction per number of periods can be established based on realistic simulation data in order to indicate how profits can be maximized.

Document Type



Warranty policy, simulation, retailer warranties, warranty benefits


Business Administration, Management, and Operations


SMU Cox: IT & Operations Management (Topic)