THE OPTIMAL PROMISED QUALITY DEFECT MODEL FOR SERVICE GUARANTEES

Wenlong Wang^{1, 2}, Xinmei Liu^{1, 2}, Xiaojie Zhang^{1, 2}

¹School of Management, Xi’an Jiaotong University, 28 Xiannin Road, Xi’an Shaanxi, China

²The key lab of the Ministry of Education for Process Control & Efficiency Engineering, 28 Xiannin Road, Xian Shaanxi, China

Service quality guarantee is an important tool for firms to boost demands, put up prices, and enhance profits. However, when promised quality defect is too high or low, the impact on the organization and the customer is usually negative. Therefore, determining the level of promised quality defect is of critical strategic and tactical importance in businesses. Yet, systematic quantitative methods aren’t found to help managers determine promised quality defect. We propose a simple but powerful model in finding the optimal promised service quality defect. The model makes trade-offs between benefits and costs of service defect guarantees. Firstly, the decision of promised quality defect is analysed when service price is exogenous. We secondly investigated when service price is endogenous, how can a service provider make decisions on service price and promised quality defect simultaneously to maximize its profit. Thirdly, comprehensive analysis of how service providers promise the optimal quality defect from two aspects of demand and supply is given. Numerical analysis is conducted to illustrate the interactive effect of endogenous service price and affected service supply. In the end, we conclude the paper and suggest areas for future research. With only definitional changes, the model can be applied to other guarantee contexts.