Offering post-sale service agreements often generates additional revenue for the providing business. This revenue stream can contribute significantly to profitability, especially for products with a higher perceived risk of malfunction or those where repair costs are typically high. For instance, a retailer selling electronics might profit considerably from offering protection plans, as consumers may be willing to pay a premium for peace of mind against potential future repair or replacement costs.
This practice has a long history in retail and serves multiple functions. It provides customers with a sense of security and protection against unforeseen expenses, fostering trust and potentially encouraging future purchases. For the business, it enhances customer loyalty and provides a predictable income stream that can be used to offset potential losses from repairs. The development of sophisticated actuarial models allows businesses to price these plans effectively, balancing customer demand with profitability.
