Profit maximization by virtue of price & warranty length optimization

Warranties serve as persuasive marketing tools: (i) promotional and (ii) protectoral. As a promotional tool, warranties serve to promote the reliability and quality of a product with longer and better warranty terms implying a more reliable product. As a protectoral tool, warranties provide assurance to consumers against defective products that fail to perform satisfactorily over the warranty period. This assurance reduces the risks associated with purchase of the product but introduces some impedimentation in profit management for the manufacturer. Using a two dimensional innovation diffusion model to demonstrate product sales cycle, this study presents a methodical approach to obtain optimal price and warranty length for a product. The model examines significance of these decision variables and estimates the overall maximum profit for the manufacturer. Exponential distribution has been used to represent the life time distribution of a product and the model has been validated using real life data set.