As product margins decline in increasingly competitive hardware markets, high-margin,
highrevenue aftermarket services such as extended warranties (EW) are becoming critical to
manufacturers' profitability (see Cohen et al. 2006). Beyond direct profits, post-sales services
are a critical lever for influencing customer loyalty, and in commodity product businesses,
service quality and variety are important competitive differentiators. Through the sale of
innovative and attractive post-sales services, a manufacturer can enable its customers to …

Traditional one-price-for-all extended warranties do not differentiate customers according to
their risk attitudes, usage rates, or operating environment. These warranties are priced to
cover the cost of high-usage customers who have more failures and are willing to pay a risk
premium for their risk aversion. That makes traditional warranties economically unattractive
to low-usage customers and those who are less risk averse. These issues can be addressed
by residual value warranties, which refund part of the up-front price to customers who have …