Pricing Model for Product Rental Services with Option to Buy

Abstract

In this paper, we develop a pricing model for rental services for products whose expected value after purchase is subject to significant uncertainty. Such rental services allow customers to pay a portion of a product’s price as a rental fee to use the product for a trial period of a given length. At the end of the trial period, users satisfied with the product may purchase it by paying the difference between the product price and the rental fee, whereas users not satisfied with the product may simply return it. We construct a pricing model for services offering this increased purchasing flexibility to customers, and then use our model to determine the optimal product price and rental fee at which corporate profit is maximized. Our results indicate that, for products expected to deliver relatively high satisfaction, offering rental services can increase overall demand and expected profit.