Xumei Zhangab*, Xiaopeng Hanab, Xiangyu Liuab, Ru Liuaband Jinzhong Lengab
aSchool of Economics and Business Administration, Chongqing University, Chongqing, China;
bResearch Center of Business Administration and Economic Development, Chongqing University, Chongqing, China
Abstract
Facing fierce competition in the global manufacturing industry, manufacturers have begun developing value-added services to increase their competitiveness. One type of sales strategy that has become prevalent is for companies to offer consumers a relatively low price for value-added services when consumers buy the services simultaneously with the product and a relatively high price for the same value-added services in the future. Considering the degree of information asymmetry about service quality and the changes of the degree of information asymmetry in a product lifecycle, this paper examines the pricing of product and value-added service. Consumers can choose whether to buy a value-added service at the time that they buy a product or in the future (which is normally described as two-stage demand for the value-added service). This two-stage demand function of the product and the value-added service is established based on consumer utility. The pricing strategies for the product and the value-added service are examined under information asymmetry through optimisation theory. Four types of pricing strategies are proposed that depend on the time that consumers choose to buy the value-added service. In addition, the results of our study show that a manufacturer choosing a pricing strategy should consider the degree of information asymmetry and consumers’ initial expectations regarding the value-added service quality. When consumers’ initial expectations regarding the value-added service quality are high, the manufacturer should choose one of the four pricing strategies that encourage consumers to buy the service simultaneously with the product. When consumers’ initial expectations regarding the value-added service quality are low, the optimal strategy for the manufacturer depends on the difference in the degree of information asymmetry.
Keywords — Product lifecycle, Value-added service, Information asymmetry, Pricing, Service quality
*Corresponding author
Address:
School of Economics and Business Administration, Section A, Chongqing University, 174 Shazhengjie, Shapingba District, Chongqing, 400044, P. R. China.
Email: zhangxumei@cqu.edu.cn
1. Introduction
As competition in the global manufacturing industry intensifies, the profits that manufacturers obtain from products are decreasing. To survive in this situation, many manufacturers, including IBM, GE, Michelin, Toyota, etc., have transformed their business models from being providers of products to becoming providers of both products and services. This transformation of manufacturers, which is called servitisation, has become an important developing trend in the manufacturing industry. (Evans et al.2007).
Servitisation is defined as “the increased offering of fuller market packages or ‘bundles’ of customer focused combinations of goods, services, support, self-service and knowledge in order to add value to core product offerings.” (Vandermerwe and Rada 1988). Servitisation shortens the distance between the manufacturer and the consumer and makes it more likely that the manufacturer will satisfy the consumer’s underlying needs (Schmenner 2009). Thus, manufacturers can earn profits and achieve sustainable development during the process of servitisation (Bascavusoglu-Moreau and Tether 2010, Jergovic et al. 2011, Parry et al. 2012).
Because the services that the manufacturer provides in the process of servitisation can add value to the product, meet consumers’ demand and improve manufacturer’s profits, the services are called value-added services. The earliest study on value-added services can be traced to Vandermerwe and Rada (1988); many scholars have followed this seminal study (Szeinbach 1997, Youngdahl and Loomba 2000, Reinartz and Ulaga 2008, Westergren 2011, etc.).
In the process of servitisation, manufacturers provide not only products but also value-added services. With regard to consumers, they can choose to buy value-added servicesat the time they buy products or they might wait to buy the services when they need them in the future. There is a gap between consumer expectations of the value-added service quality and the real value-added service quality manufacturers provide (hereinafter referred to as information asymmetry). The information asymmetry gap changes over time and influences consumers’ decisions regarding their purchase time for services. The time at which consumers choose to buy the service also affects manufacturers’ profits. To improve profits, manufacturers always adopt the pricing strategy that they charge consumers a relatively low price when they choose to buy the services simultaneously with the products and charge them a relatively high price when they choose to buy the services in the future.