Planning product design refreshes with service contract and competition considerations

Product design refresh programs are critical to maintaining or increasing market share in competitive markets. Programs are generally defined by the frequency of product introductions and level of product improvement with each new release. In this paper, a design refresh program is defined by technological change, measured by the improvement in product reliability. A consumer's optimal replacement strategy is analyzed for each design refresh program with dynamic programming. We are also interested in the effect of a warranty (or service contract) on the consumer's decision. Given the product price, associated warranty period and consumer's preferences, the optimal design refresh program to be offered by the manufacturer is determined under different market conditions in a game theoretic framework. The results show that a long warranty period induces a high rate of technological improvement. Also, when competition increases, the design refresh program frequency is accelerated. However, the program investment costs and consumer service contracts are crucial factors that should also be considered.