Date of Graduation
8-2024
Document Type
Dissertation
Degree Name
Doctor of Philosophy in Business Administration (PhD)
Degree Level
Graduate
Department
Marketing
Advisor/Mentor
Gauri, Dinesh K.
Committee Member
Chen, Jialie
Second Committee Member
Jindal, Rupinder P.
Third Committee Member
Bhave, Ashutosh
Keywords
Electronics; Extended warranties; Pricing; Retailing
Abstract
Extended warranties (EW) have gained significant traction as a powerful revenue stream for retailers, boasting substantial profit margins ranging from 50% to 70% (Bloomberg week). These warranties offer consumers peace of mind by providing additional protection beyond the standard manufacturer warranty and are to be purchased at an additional cost. By offering extended warranties, retailers can differentiate themselves in a competitive market, build stronger customer relationships, and enhance their overall profitability. However, effectively capitalizing on their potential necessitates a strategic approach. The extant literature is focused on studying extended warranties from the perspective of a consumer and lacks a retailer perspective. This dissertation fills this research gap by evaluating how managers can enhance profitability from selling extended warranties. Specifically, this research delves into the impact of a dynamic, personalized pricing strategy for extended warranties on retailer profitability and examines the store and market factors that drive EW sales across various categories, aiming to identify the optimal approaches that maximize revenue for retailers. The findings from this research have significant implications for how retailers can enhance their overall revenue through strategic pricing and targeted marketing of extended warranties. The first chapter of this dissertation examines the benefits of implementing a pricing strategy to boost revenue from extended warranties. Specifically, it assesses the current pricing of extended warranties on electronic products and develops a dynamic, customized pricing strategy that considers consumer engagement, price sensitivity, and the price ratio of extended warranties to the underlying product price. A demand model captures how the price ratio affects the purchase decision, using a logit model and maximum likelihood estimation. Results show that the EW decision is influenced by the price ratio, engagement, and sensitivity, leading to a revenue-maximizing personalized pricing strategy. This strategy increases overall electronic product revenue by 1.3% and extended warranty revenue by 53%. Additionally, a simplified framework for smaller retailers is proposed, highlighting the importance of leveraging customer engagement and price sensitivity to develop dynamic personalized pricing strategies. The second chapter of this dissertation investigates the impact of store features and the risk preferences of neighborhood consumers on the demand for extended warranties (EWs) for electronic products at the store level. Utilizing a fractional logit regression model with EW and electronics sales data from a major US retailer, the study examines how market characteristics (such as income, education, unemployment, and gender) and store features (such as product variety and average cost) influence EW sales. The findings indicate that factors such as the average price of electronic products, repeat buyers, product variety, and market characteristics significantly affect EW sales, reflecting consumer preferences for risk aversion and variety seeking. The study also explores variations in EW sales across product categories and finds that EWs are more popular for household products than for personal use products. These insights can help retailers optimize inventory and promotion strategies to effectively incentivize the purchase of extended warranties.
Citation
Rayachoty, V. (2024). Essays on Empirical Investigation of Extended Warranties of Consumer Electronics. Graduate Theses and Dissertations Retrieved from https://scholarworks.uark.edu/etd/5395