Joint pricing and inventory management under servitisation

Chao Xu, Yongrui Duan and Jiazhen Huo

Journal of the Operational Research Society, 2020, vol. 71, issue 6, 893-909

Abstract: We analyse a problem involving the joint pricing of a product and associated service, together with the management of inventory under servitisation. For a finite planning horizon, the firm sells both a product and a product-centric service whose market size depends on the past sales of the product. At the beginning of each period, the firm simultaneously decides the price of the product, the price of the service, and the replenishment quantity. We prove that a modified base-stock list-price policy is optimal to this problem. In addition, we find that there is a trade-off between realising current profit from the product and stimulating demand to increase future profit, and that overlooking this trade-off results in overall loss of profit for the firm. Moreover, the optimal policy that takes the trade-off into account leads to a lower optimal product price compared with a myopic policy, and the optimal price increases as a function of the past sales of the product.

Date: 2020
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DOI: 10.1080/01605682.2019.1590510

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