Pricing of full-service repair contracts

Full-service repair contracts are becoming increasingly popular, especially as an add-on to leasing contracts for technical investment products. This paper presents a model for pricing full-service repair contracts in the presence of risk-averse customers. The model identifies the optimal portfolio of full-service contracts and on-call service agreements to be offered by the service provider. The optimal full-service price is established, with failure arrivals being modeled as Poisson events and the cost of individual failures being stochastic. An existing on-call service business represents the price benchmark. The model is readily applicable for any service provider for small investment products such as special-purpose trucks or printing equipment.

► We model the pricing of full-service contracts.
► Customers choose optimal service type based on the degree of risk aversion.
► Full-service prices increase with increasing maximum risk aversion.
► Full-service prices decrease with increasing guaranteed repair time.