Optimal sales strategy of bundling products with extended warranties

Extended warranties serve as a significant profit driver for manufacturers. This paper introduces a strategy for bundling extended warranties with products and compares it with existing sales strategy. This paper delineates the customer decision-making process for both strategies for the first time, subsequently evaluating the manufacturer’s costs and revenue to derive the profit function. To comprehensively examine the profitability, a thorough numerical study is conducted, comparing the performance under both strategies. The findings demonstrate that bundling yields higher profits for manufacturers compared to separate sales, while also exhibiting the potential to substantially expand the market size.