Service Provision in Distribution Channels

Abstract

Consumers may need help using an inherently complex product after purchase. This article studies a manufacturer's and a retailer's incentives to provide presales service and after-sales support in a distribution channel. The authors consider a model in which a manufacturer makes wholesale price and channel service decisions. Subsequently, a retailer makes retail price and channel service decisions. They find that, in equilibrium, both channel members provide presales service. If the fixed-cost investment needed to enhance the effectiveness of after-sales support is small, the manufacturer lets the retailer provide after-sales support. Yet when it is above a threshold and the retailer becomes unwilling to invest in providing after-sales support, the manufacturer steps in and does so. As expected, when the fixed cost is too large, the manufacturer also opts out of providing after-sales support. Interestingly, when the retailer provides after-sales support, the level of presales service and the demand for after-sales support can simultaneously be the highest among all configurations. Finally, the authors demonstrate the robustness of their main results by studying alternative channel service configurations.

Keywords

distribution channel presales service after-sales support customer service

In an effort to ensure that their products can provide a better fit with consumers’ diverse needs, firms are constantly adding new options and customizable features to their products. These sophisticated products can potentially create more value for consumers (and higher profits for manufacturers and retailers) by better serving their needs (see Levy, Weitz, and Grewal 2013). However, because the products can be relatively complex, customers often find that they are unable to understand the new features and need customer support more than ever. Consumers may call the manufacturer or visit the retail store to seek help in using the product. The need for such after-sales support can be reduced by providing an up-front presales service that teaches the customer how to use the product through demonstrations, trials, and other forms of customer education. This article studies a manufacturer's and a retailer's incentives to provide presales service and after-sales support to consumers for a complex-to-use durable product. The following examples exhibit some of the features we capture in the model.

Consumer electronics (e.g., smartphones, tablets, laptops) have become increasingly complex (see Bajarin 2016). Consequently, manufacturers are taking steps to ensure that their prospective customers, as well as those who have already purchased the product, can easily acquire the information needed to use the products. Apple hires highly trained salespeople to provide sales assistance and educate consumers about its products. Samsung has set up “Samsung Experience Stores” in Best Buy locations, where Samsung employees are present to help customers learn how to use Samsung phones and tablets and how to perform software updates (see Kovach 2013).

Home Depot has thousands of how-to videos on its website to demonstrate how to use, assemble, or install its products. These videos complement manufacturers’ user manuals by providing audio and video introduction and illustration of products sold in the store. Other examples abound in firms’ marketing activity to educate and support consumers. The Micro Center, a large computer and electronics retailer, offers free walk-in technical support for a wide range of topics and issues such as hardware troubleshooting, software configuration, and upgrades.¹ Costco provides manufacturer-produced video introductions of products on its website for several categories. However, customers are asked to contact the manufacturer directly if they need help setting up, assembling, or installing a product after buying it from Costco.

Microsoft and Best Buy announced a strategic partnership in 2013 to create the “Windows Store,” a comprehensive store-within-a-store, at Best Buy stores. The alliance added more than 1,200 Best Buy Microsoft-trained sales associates to serve Microsoft customers in Best Buy stores (Microsoft News Center 2013). Until recently, Tesla and Home Depot partnered to provide solar solutions whereby Tesla employees were positioned to assist customers at Home Depot stores. (The partnership was discontinued at the end of 2018 due to a restructuring at Tesla [Alvarez 2018].) In another example, Williams-Sonoma operates the Le Creuset brand shop within its stores, and representatives from Le Creuset often offer cooking demonstrations to consumers.² Similar examples abound in other industries as well. For example, auto dealers in India are increasingly collaborating with automakers to enhance the effectiveness of their sales-related efforts, such as product training, guidance in test drives, and vehicle display (J.D. Power 2014).

We would like to emphasize three important features in the previous examples. First, for complex products, consumers may need to go through the inconvenience of seeking after-sales support to correctly use the product after purchase. Although after-sales support can help consumers learn how to use complex products, presales service can reduce the likelihood that they will actually need any after-sales support. Second, after-sales support can also be provided by either the retailer or the manufacturer. Similarly, presales service assistance can be provided by either the retailer or the manufacturer. In many cases, channel members may choose to coprovide presales service to consumers. Third, both presales service and after-sales support require the provider's investment in resources. Examples of presales service include fixed investments in keeping an inventory of various car models at the dealership for test drives and having cell phone models available at retail locations, sales force training, excellent-quality brochures, and in-store videos/demonstrations, among others. An increase in presales assistance would reduce the likelihood of the customer returning for after-sales support, which is usually provided to consumers by answering product-use-related questions or having a customer-service representative show how a particular feature is used. We capture these features in our model.

We consider a manufacturer that sells an information-intensive complex durable product to consumers through a retailer. Consumers decide whether to make a one-time purchase of the durable product, and they anticipate incurring an inconvenience cost if they need help using the product after purchase. The after-sales-support cost, which includes both fixed and variable components, is incurred by the manufacturer or the retailer. Before purchase, presales service can educate consumers on how to use the product and reduce the likelihood that they will need after-sales support. The cost of providing presales service depends on the level of service set by the service provider. Both the manufacturer and the retailer may coprovide presales service to consumers. To examine the strategic incentives (that are not just cost driven) of providing services, we assume that the cost of providing presales service (and after-sales support) is the same regardless of whether the service is provided by the manufacturer or the retailer. We investigate the manufacturer's and the retailer's incentives to provide presales service and after-sales support.

An important objective of the article is to study different channel service configurations that can arise in equilibrium and how they dictate the level of presales service and the demand for after-sales support. We find that both the manufacturer and the retailer set a strictly positive level of presales service. Because a higher presales service set by the manufacturer not only increases product demand but also induces the retailer to set a higher presales service, both channel members set it at strictly positive levels. If the fixed cost associated with providing effective after-sales support is low, the service configuration in which the retailer provides after-sales support constitutes the equilibrium. The manufacturer does not invest in providing after-sales support even when doing so is costless; by letting the retailer provide after-sales support and being able to set a low wholesale price (due to not providing after-sales support), the manufacturer incentivizes the retailer to set a high presales service.

Interestingly, when the fixed cost associated with providing effective after-sales support is in an intermediate range, the manufacturer provides after-sales support. The manufacturer steps in to provide after-sales support when the fixed cost becomes so high that the retailer becomes unwilling to invest in providing after-sales support. In this configuration, driven by the retailer's lower incentive to provide presales service, a lower level of presales service is offered to consumers. As expected, if the fixed cost is sufficiently high, neither the manufacturer nor the retailer provides after-sales support. In this case, consumers rely on third-party providers for their after-sales support needs. If consumers find it highly inconvenient to seek after-sales support from third-party providers, the channel provides a high level of presales service to reduce the likelihood that consumers would need after-sales support.

An interesting observation is that both the presales service (the objective of which is to reduce consumers’ need for after-sales support) and the demand for after-sales support can simultaneously be the highest in the service configuration in which the retailer provides both presales service and after-sales support but the manufacturer provides only presales service. Because a high level of presales service reduces the likelihood that consumers will need after-sales support, the demand for the product increases significantly. Therefore, the demand for after-sales support can also increase even when only a small proportion of consumers actually seeks after-sales support.

We acknowledge that in some situations, directly investing in presales service may not be desirable or feasible for both channel members, due to the associated coordination issues and the possibility that consumers will receive conflicting information. We formally examine channel service configurations without coprovision of presales service. We find that in this alternative model setup, key results are qualitatively similar to those in our main model. Specifically, the service configuration in which the retailer provides both presales service and after-sales support constitutes the equilibrium. In this service configuration, presales service is provided at the highest level. Yet, the demand for after-sales support may also be the highest.

Finally, in the model presented in the “Cost Sharing for Presales Service” section, we allow the manufacturer to share a proportion of the retailer's presales service cost, given that we have observed this to occur in the real world.³ We find that when the retailer provides both presales service and after-sales support, cost sharing by the manufacturer increases the manufacturer's profit but reduces the retailer's profit. Overall channel profit also decreases. However, when the manufacturer provides after-sales support, the manufacturer's cost sharing can increase both channel members and, therefore, overall channel profits. We also find that in the presence of cost-sharing considerations, the retailer providing both presales service and after-sales support and the manufacturer sharing a proportion of the retailer's presales service cost constitute the equilibrium. However, the same configuration without cost sharing generates the highest overall channel profits.

At this point, we would like to highlight that our article applies to complex durable goods (e.g., lawn mowers, consumer electronics, home appliances) for which consumers make a one-time purchase decision. It does not fit well with service industries (e.g., telecommunication, information technology), where subscription pricing is common and churn is an important consideration. A key feature of our model is that the consumers’ likelihood of seeking after-sales support can be reduced by providing presales service. As such, the model does not apply to simple durable goods (e.g., clothing, shoes) for which consumers typically do not need help using the product after purchase. Finally, the role of after-sales support in this article is to help consumers effectively use the product by providing information. It is not to resolve product failures or provide repairs.

Related Literature

Service provision in distribution channels has been extensively studied in the marketing literature (see Bhardwaj [2001], Desiraju and Moorthy [1997], Iyer [1998], Wernerfelt [1994], and references therein) as well as in the operations management literature (see Chen [2000], Li et al. [2016], and references therein). In this literature, service is usually captured as a generalization of all kinds of nonpricing factors. Some articles do focus on specific forms of service, including the franchisee's service input (Desai and Srinivasan 1995), in-store activities such as merchandising and advertising (Krishnan, Kapuscinski, and Butz 2004), and personal selling (Wernerfelt 1994), among others. The specific service we focus on is in the form of educating consumers prior to their purchase by providing product-related information and product demonstration, similar to what is considered in Wernerfelt (1996) and Ofek, Katona, and Sarvary (2011), and assisting consumers who are having difficulty using the product after their purchase.

Krishnan, Kapuscinski, and Butz (2004) focus on the service provided prior to the customer's purchase in order to generate more demand. By contrast, Kim, Cohen, and Netessine (2007) focus on the service that is provided after purchase. The literature does not differentiate between different types of service (presales service and after-sales support), which we explicitly model in our article. More importantly, the two types of services are related to each other in the sense that the presales service affects the need for after-sales service and therefore has an impact on the cost incurred for the latter. In addition, most articles in the literature assume that both types of services are provided by a single channel member. Thus, they do not study the problem of service channel design, which is the focus of this research. In a related article, Jerath and Zhang (2010) examine the drivers behind the prevalence of store-within-a-store and show that a powerful retailer giving autonomy to manufacturers can lead to this type of channel structure. We contribute to the literature on channel service design by explicitly studying channel members’ incentives to provide presales service and after-sales support—these have strikingly different roles but are often combined and considered the same in the literature.

We derive consumer demand from micro-foundations by considering the service action taken by channel members in educating consumers before purchase. This service would result in a lower expected inconvenience cost for consumers when they make the purchase decision and therefore would increase their willingness to buy. Our article enriches the literature by modeling this fundamental effect of service. In this respect, our work is related to Ofek, Katona, and Sarvary (2011). In their model, consumers may make costly product returns after purchase. Similar to their model, consumers’ valuations in our model are affected by the disutility associated with the likelihood that they will seek after-sales support. This effect can, however, be mitigated by channel members’ investment in a presales store assistance effort to reduce this probability. As such, important differences exist in the model setting and in the research focus. Whereas Ofek, Katona, and Sarvary (2011) focus on horizontal competition between retailers and study their pricing and effort decisions in the presence of online stores, our article focuses on channel members’ decisions to provide presales service and after-sales support.

In addition to the literature on service provisions, our article is also related to a stream of literature on cooperation between channel members. Various contract forms—for example, buyback (Padmanabhan and Png 1997; Pasternack 1985; Taylor 2002), revenue sharing (Cachon and Lariviere 2005), and quantity discount (Ingene and Parry 1995; Jeuland and Shugan 1983; Raju and Zhang 2005)—have been studied.⁴ In a related article, Jiang et al. (2016) investigate a manufacturer's incentive to share private demand information with the retailer. The authors show the manufacturer but not the retailer prefers such information sharing. Other works have also looked at cooperative mechanisms. For example, Iyer and Villas-Boas (2003) examine the role of bargaining and show it affects channel coordination, particularly when products are not completely specifiable. Chao, Iravani, and Savaskan (2009) study contractual agreements by which a manufacturer and a supplier can share the product recall cost to induce improvement in quality. Tang, Gurnani, and Gupta (2014) consider a model of cost sharing in supply-reliability improvement wherein a buyer can provide a subsidy to an upstream supplier to improve supply reliability. We contribute to this literature by explicitly studying channel members’ incentives to coprovide presales service. We also examine a manufacturer's incentive to share an endogenous proportion of the retailer's presales service cost. In contrast to the findings of the coordination literature, we show that in some cases, the cost-sharing contract may actually hurt the retailer and the entire channel.

The rest of the article is organized as follows. In the following sections, we introduce our main model and present its analysis and results. Next, we examine an alternative model setup in which channel members cannot coprovide presales service. Then, we examine the possibility of the manufacturer sharing the retailer's cost of providing presales service. Finally, we conclude and discuss directions for future research.

Model Preliminaries

Consider a distribution channel in which a manufacturer sells an information-intensive durable product to consumers through a downstream retailer. The manufacturer produces the product at a constant marginal cost c = 0 and sells it to the retailer at wholesale price w. The retailer sells the product to consumers at retail price p. A unit mass of consumers with heterogeneous product valuations is present in the market. The valuation v of a consumer is a draw from a uniform distribution $U [0, 1]$ . Consumers make a one-time purchase decision.

Because the product the manufacturer sells is complex in nature, consumers may have difficulty using it after purchase. A consumer may need to call customer support, drive to the store, or reach out to the manufacturer. Consumers may feel frustrated in such a situation, because they cannot enjoy the product immediately and contacting customer support may not always be smooth. As such, seeking after-sales support is costly to consumers. We introduce an inconvenience cost r that captures any disutility to consumers when seeking after-sales support. The manufacturer and the retailer can reduce the likelihood of consumers seeking after-sales support by investing in presales service.⁵ This presales service can better inform the consumer on how to use the product, reducing the likelihood that they will need after-sales support.⁶

We denote the presales service levels set by the manufacturer and the retailer by $λ_{M} \in [0, 1]$ and $λ_{R} \in [0, 1]$ , respectively, where $λ_{M} + λ_{R} \leq 1$ . As a consequence of the presales service provided by channel members, consumers’ likelihood of seeking after-sales support reduces from 1 to $1 - (λ_{M} + λ_{R})$ . If the highest level of presales service, $λ_{M} + λ_{R} = 1$ , is offered, consumers would be fully informed on how to use the product and thus would not need additional after-sales support. We assume that investment in presales service has a diminishing impact, and we capture it by assuming a convex cost function, ${h λ}_{M}^{2} / 2$ for the manufacturer and ${h λ}_{R}^{2} / 2$ for the retailer, where $h \geq 1$ . Because the investment in presales service is made prior to the consumers’ purchase decision (and both eventual purchasers and nonpurchasers may seek presales service to learn about the product), we consider this investment a fixed cost for the provider. The assumption that $h \geq 1$ ensures the joint concavity of the profit functions and that the optimal levels of presales service $λ_{M}$ and $λ_{R}$ , retail price p, and market demand are feasible (between 0 and 1) in equilibrium. An implication of this assumption is that in equilibrium, a consumer who finds it optimal to buy the product also finds it optimal to seek after-sales service (if needed).⁷ In addition, although we recognize that, in practice, the manufacturer and the retailer may have different costs of providing presales service, because the focus of our article is on examining strategic service-provision incentives that are not cost driven, we assume that the manufacturer and the retailer have the same cost coefficient, h. Similar to Mamer (1987), Soberman (2003), Ofek, Katona, and Sarvary (2011), and Wang and Hu (2020), the consumer's expected inconvenience cost (given a presales service of $λ_{M} + λ_{R}$ ) is $(1 - λ_{M} - λ_{R}) r$ .

In the event that a consumer seeks after-sales support by calling customer service or by visiting a store, an expert familiar with the product responds to their queries and helps them with using the product. The after-sales support provider incurs a handling cost k associated with providing assistance to the consumer. Because a consumer seeks after-sales support with probability $(1 - λ_{M} - λ_{R})$ , the per customer expected cost of providing after-sales service is simply $(1 - λ_{M} - λ_{R}) k$ . Since the provision of after-sales support is only for consumers who have already purchased the product, the cost for the provider is proportional to the number of consumers seeking after-sales support. We assume that the after-sales support is effective only when a fixed cost F is incurred by the provider. We normalize the proportion of consumers whose product use–related difficulties are resolved with ineffective after-sales support (i.e., when the fixed cost is not incurred) to zero. The advantage of using this normalization is that providing ineffective after-sales support becomes essentially equivalent to not providing it. Similar to the cost of providing presales service, we assume the same handling cost k for both channel members.

The expected utility of a consumer with valuation v who buys the product at price p and incurs an expected inconvenience cost of $(1 - λ_{M} - λ_{R}) r$ from seeking after-sales support can be written as $v - p - (1 - λ_{M} - λ_{R}) r$ . All consumers with positive surplus buy the product, which translates into the demand, $D = 1 - p - (1 - λ_{M} - λ_{R}) r$ , for the product. Note that higher presales service results in higher demand. In this sense, presales service can be thought of as a customer-acquisition effort. The demand for after-sales support, defined as $D^{a}$ , is equal to $(1 - λ_{M} - λ_{R}) D$ .

The presales service can be provided by the manufacturer, the retailer, or both. Consistent with industry practice (possibly due to difficulty in coordinating coprovision of after-sales support), we assume that after-sales support is provided by at most one channel member: the manufacturer or the retailer. We allow for the possibility that both channel members choose to not provide after-sales support. In this case, consumers may rely on third-party providers (e.g., online forums, YouTube videos, experts) to resolve their problems. We assume that consumers seeking support from third-party providers incur an associated inconvenience cost $δ$ , where $δ \geq r$ .⁸ We identify the provider(s) of channel service by “ij,” where $i \in {M, R, B}$ represents whether the manufacturer M, the retailer R, or both B provide presales service, and $j \in {M, R, S}$ represents whether the manufacturer M, the retailer R, or a third party S provides after-sales support. For example, BR represents a service configuration in which both the manufacturer and the retailer (B) provide strictly positive levels of presales service and the retailer (R) provides after-sales support. We can write the retailer's profit as

\begin{aligned} π_{R}^{ij} = [1 - p - (1 - λ_{R} - λ_{M}) r] [p - w - (1 - λ_{R} - λ_{M}) k \times I (j = R)] - \frac{1}{2} {h λ}_{R}^{2} - F \times I (j = R), \end{aligned}

(1)

where

I (.)

is the indicator function that takes the value of 1 if the condition is satisfied, and 0 otherwise. The manufacturer's expected profit can be similarly expressed as

π_{M}^{ij} = [1 - p - (1 - λ_{R} - λ_{M}) r] [w - (1 - λ_{R} - λ_{M}) k \times I (j = M)] - \frac{1}{2} {h λ}_{M}^{2} - F \times I (j = M) .

(2)

Note that the marginal cost for both the manufacturer and the retailer may include the cost of providing after-sales support, depending on the service configuration. We refer to the margin that accounts for the cost of providing after-sales support as the “effective margin.” Therefore, the retailer's effective margin,

m_{R}

, is

p - w - (1 - λ_{R} - λ_{M}) k \times I (j = R)

, and the manufacturer's effective wholesale margin,

m_{M}

, is

w - (1 - λ_{R} - λ_{M}) k \times I (j = M)

The sequence of events is as follows. In the first stage, the manufacturer sets the wholesale price w, invests in the presales effort $λ_{M}$ , and chooses whether to incur a fixed cost F for after-sales support. Not incurring the fixed cost F is essentially equivalent to not providing after-sales support. Next, the retailer invests in presales service $λ_{R}$ and sets price p. In addition, if the manufacturer opts out of providing after-sales support, the retailer decides whether to incur a fixed cost F for after-sales support. Then, the consumers make their purchasing decisions and seek after-sales support, as needed. If after-sales support is not provided by any channel members, consumers rely on a third-party provider for their after-sales service needs. Finally, payoffs are realized. Similar to the warranty literature (e.g., Balachander 2001; Jiang and Zhang 2011; Padmanabhan and Rao 1993), we assume that the after-sales service provider follows through and provides after-sales support after consumers have bought the product (due to reputational or legal considerations). We also assume that the model parameters r, k, and h are common knowledge and $(k + r) < 1$ , which ensures demand is feasible (between 0 and 1).

Analysis and Results

Given the manufacturer's decisions, the retailer can be in one of two possible decision nodes. In the first node, the retailer observes that the manufacturer has invested (the fixed cost F) toward providing after-sales support in addition to setting presales effort $λ_{M}$ and wholesale price w. The retailer sets service level $λ_{R}$ and retail price p that maximize its profits given by

π_{R}^{BM} = [1 - p - (1 - λ_{R} - λ_{M}) r] (p - w) - \frac{1}{2} {h λ}_{R}^{2} .

(3)

In the second node, the retailer observes that the manufacturer did not invest in after-sales support and simply set

λ_{M}

and w. In this case, the retailer decides whether to invest the fixed cost F toward after-sales support and sets

λ_{R}

and p. If the retailer opts into providing after-sales support by investing a fixed cost F, it sets

λ_{R}

and p that maximizes

π_{R}^{BR} = [1 - p - (1 - λ_{R} - λ_{M}) r] [p - w - (1 - λ_{R} - λ_{M}) k] - \frac{1}{2} {h λ}_{R}^{2} - F .

(4)

If the retailer also opts out of providing after-sales support, consumers end up relying on third-party providers to fulfill their after-sales support needs at an inconvenience cost

δ

. In this case, the retailer sets

λ_{R}

and p that maximizes

π_{R}^{BS} = [1 - p - (1 - λ_{R} - λ_{M}) δ] (p - w) - \frac{1}{2} {h λ}_{R}^{2} .

(5)

The retailer compares its expected profits in Equations 4 and 5 and chooses to incur the fixed cost F toward after-sales support if the fixed cost is below a threshold (expression provided in the Appendix). If the fixed cost F is larger than the threshold, the retailer also opts out of providing after-sales support. In this case, if needed, consumers seek after-sales support from third-party providers. The manufacturer decides whether to invest the fixed cost F in addition to setting presales service

λ_{M}

and wholesale price w, anticipating the aforementioned responses from the retailer. The equilibrium service configuration depends on the fixed cost F. In the following two propositions, we describe equilibria that can arise in the current model setup. (The thresholds

F_{R}

and

F_{M}

are defined in the Appendix. Expressions for the equilibrium wholesale and retail prices also appear in the Appendix.)

Proposition 1:

If $F < F_{R}$ , in equilibrium,

the manufacturer opts out of providing after-sales support and sets $λ_{M} = \frac{(1 - k - r) (k + r)}{4 h - 3 {(k + r)}^{2}},$ and

the retailer invests fixed cost $F$ in after-sales support and sets $λ_{R} = λ_{M}$ .

If the fixed cost F of providing after-sales support is sufficiently small (i.e., if $F < F_{R}$ ), in equilibrium, the manufacturer incentivizes the retailer to invest in and provide after-sales support to consumers. The manufacturer does not invest in providing after-sales support when the fixed cost of doing so is small or even zero. The reason is that the channel member that bears the cost of providing after-sales support also worries more about reducing the demand for after-sales support by providing presales service. The manufacturer lets the retailer provide after-sales support (when investing in it does not cost much) to create incentives for the retailer to provide presales service. We find that, in equilibrium, both the manufacturer and the retailer provide strictly positive levels of presales service. Because a higher $λ_{M}$ set by the manufacturer not only increases product demand but also induces the retailer to set a higher $λ_{R}$ , both channel members set strictly positive levels of presales service.

Two competing forces dictate the manufacturer's chosen level of presales service compared with that of the retailer. First, the manufacturer's presales service is not as effective as the retailer's presales service at increasing product demand. The reason is that the higher wholesale price (which drives the retail price higher) associated with a higher $λ_{M}$ reduces the effect of $λ_{M}$ on demand. The lower wholesale price that the manufacturer sets when setting a lower $λ_{M}$ can induce the retailer to set a higher $λ_{R}$ . The manufacturer will be better off setting a $λ_{M}$ that is lower than $λ_{R}$ , if the motivation is to increase demand. Second, a higher $λ_{M}$ set by the manufacturer induces the retailer to set a higher $λ_{R}$ . Therefore, the manufacturer should try to provide presales service at the highest possible level. A combination of the two forces drives the manufacturer to set the presales service at the same level it expects the retailer to set (i.e., in equilibrium $λ_{R} = λ_{M}$ ). The comparative statics of presales service levels with respect to the parameters (h, k, and r) generates interesting insights.

Corollary 1:

When the retailer provides after-sales support in equilibrium, presales service levels ( $λ_{M}$ and $λ_{R}$ ) decrease with higher h but exhibit a nonmonotonic relationship (first increase and then decrease) with parameters k and r.

As expected, a higher cost h of providing presales service reduces the equilibrium presales service chosen by channel members. Interestingly, the effect of parameters k and r on the presales service levels is nonmonotone. Suppose that after-sales support cost k is small. An increase in k reduces the retailer's incentive to provide after-sales support. The manufacturer sets a higher $λ_{M}$ to incentivize the retailer to provide after-sales service and set a higher $λ_{R}$ . Both a higher $λ_{M}$ and a higher $λ_{R}$ reduce the demand for after-sales support and mitigate the effect of a higher k. However, if k is sufficiently large, the product demand becomes small due to the high retail price that is associated with high presales service. At this point, investing in presales service to reduce the proportion of consumers seeking after-sales support is not very rewarding. The implication is that channel members reduce presales service levels $λ_{M}$ and $λ_{R}$ . The effect of consumers’ inconvenience cost r is similar. If r is small, channel members attempt to address any increase in $r$ by offering better presales service. However, if r is large, channel members do not find investing in presales service as rewarding (because expected demand is small) and reduce presales service levels.

The equilibrium configuration in which the retailer provides presales service requires the fixed cost (F) to be sufficiently small. Next, we explore the possibility of the existence of other equilibrium service configurations. In particular, we want to examine if an equilibrium exists in which the manufacturer provides after-sales support. Furthermore, is it possible that no channel member would provide after-sales support? Indeed, we find that such configurations may arise in the equilibrium. The following proposition describes their existence. For ease of presentation, we define a threshold presales service cost parameter $h_{f}$ (in the Appendix) such that the manufacturer provides after-sales support only if $h > h_{f}$ .

Proposition 2:

If $F > F_{M}$ , both the manufacturer and the retailer opt out of providing after-sales support and set $λ_{M} = λ_{R} = \frac{δ (1 - δ)}{4 h - 3 δ^{2}}$ . In addition, if $h > h_{f}$ , there exists an $F \in [F_{R}, F_{M}]$ such that in the equilibrium, the manufacturer opts in to provide after-sales support and sets $λ_{M} = \frac{(1 - k - r) (k + r)}{4 h - (k + 3 r) (k + r)}$ and the retailer sets $λ_{R} = \frac{(1 - k - r) r}{4 h - (k + 3 r) (k + r)}$ , where $λ_{M} > λ_{R}$ .

If the fixed-cost investment F needed to provide an effective after-sales service is sufficiently large, the manufacturer understands that the retailer will also choose to opt out of providing after-sales support if the manufacturer did so. The manufacturer compares its payoff from the following two strategies: (1) invest $F$ and provide after-sales support or (2) do not invest and let consumers seek help from third-party providers. The manufacturer opts out if $F$ is too high (i.e., if $F > F_{M}$ ), and consumers rely on third-party providers for their after-sales support needs. In this equilibrium, both the manufacturer and the retailer set a strictly positive and same level of presales service ( $λ_{M} = λ_{R}$ ). The intuition for this presales service result is the same as for the similar result in Proposition 1 and is therefore not repeated.

In addition, as described in Proposition 2, there also exists an equilibrium in which the manufacturer provides after-sales support. If the fixed cost F is high enough that the retailer is not willing to invest in after-sales support but low enough that the manufacturer prefers to provide after-sales support instead of letting consumers seek it from third-party providers, the manufacturer invests F and provides after-sales support. A high cost of providing presales service ( $h > h_{f}$ ) drives ( $λ_{M} + λ_{R}$ ) low and makes the provision of after-sales support extremely valuable for consumers. Under these conditions, the manufacturer addresses consumers’ need for after-sales support by incurring the fixed cost F.

If the manufacturer provides after-sales support in equilibrium, its motivation behind setting presales service ( $λ_{M}$ ) becomes twofold. A higher $λ_{M}$ results in more consumers buying the product. A higher $λ_{M}$ also reduces the proportion of consumers seeking after-sales support. Therefore, the manufacturer is willing to set a $λ_{M}$ that is even higher than $λ_{R}$ . However, the presales service ( $λ_{M}$ ) set by the manufacturer (and therefore the sum of $λ_{M}$ and $λ_{R}$ ) in this service configuration is lower than the one specified in Proposition 1. The retailer's incentive to provide presales service decreases significantly when it does not provide after-sales support. In addition, the manufacturer is also not as willing to set a high presales service due to the positive associated effect on wholesale prices, which eventually drives the demand down by increasing the retail price.

Corollary 2:

When the manufacturer provides after-sales support in equilibrium, presales service levels ( $λ_{M}$ and $λ_{R}$ ) decrease with higher h but exhibit a nonmonotonic relationship (first increase and then decrease) with r. In addition, although $λ_{M}$ is nonmonotone in k, $λ_{R}$ is decreasing in k.⁹

The effect of parameters h and r on presales service levels ( $λ_{M}$ and $λ_{R}$ ) and its intuition are similar to the service configuration in which the retailer provides after-sales support (described in Corollary 1). However, the effect of after-sales support cost k on presales service levels is strikingly different: although $λ_{M}$ first increases and then decreases in k, $λ_{R}$ is decreasing in k. The reason is that when k increases from a small value, the manufacturer, which bears the cost of providing after-sales support, increases $λ_{M}$ to reduce the demand for after-sales support. However, because a higher $λ_{M}$ is associated with a higher wholesale price, the retailer, which does not directly bear the after-sales support cost, responds by setting a lower $λ_{R}$ . Similar to Corollary 1, when k is sufficiently large, presales service levels decrease in k for both channel members.

As described in Propositions 1 and 2, we have three possible channel service configurations: (1) the retailer provides both presales service and after-sales support, whereas the manufacturer provides only presales service; (2) the retailer provides only presales service, whereas the manufacturer provides both presales service and after-sales support; and (3) both the manufacturer and the retailer provide only presales service and consumers rely on third-party providers for after-sales support. In the following proposition, we compare the presales service ( $λ_{M} + λ_{R}$ ) and the demand $D^{a}$ for after-sales support among the three possible equilibrium channel service configurations. (Thresholds $δ_{b}$ and $\hat{h}$ are defined in the Appendix.)

Proposition 3:

a. If $δ > δ_{b},$ presales service ( $λ_{M} + λ_{R}$ ) is highest in the configuration in which the retailer provides both presales service and after-sales support, whereas the manufacturer provides only presales service.¹⁰ Otherwise, it is highest in the configuration in which after-sales support is provided by third-party providers.

b. If $k + r > \frac{1}{3}$ and $h > \hat{h}$ , the demand for after-sales support is the highest when the retailer provides both types of services, whereas the manufacturer provides only presales service.

First, suppose $δ$ is high ( $δ > δ_{b}$ ) and yet no channel member provides after-sales support. In this case, very few consumers would buy the product. Therefore, investing in presales service would be less rewarding for channel members. Now, suppose $δ$ is high ( $δ > δ_{b}$ ) and after-sales support is provided by one of the channel members. In this case, incentives to provide presales service are higher in the configuration in which the retailer provides after-sales support (in addition to providing presales service) than in the configuration in which the manufacturer provides both types of services. The reason is that a channel member's incentive to provide presales service increases when it also provides after-sales support. However, when the manufacturer sets both types of services, the retailer's incentives to provide presales service decrease due to the associated increase in the wholesale price. Therefore, if $δ > δ_{b},$ presales service is highest in the channel service configuration in which the retailer provides both presales service and after-sales support, whereas the manufacturer provides only presales service.

If $δ$ is sufficiently small, the product demand is reasonably large even when channel members do not provide after-sales support. In this case, consumers seek after-sales support from third-party providers. Channel members set presales service at the highest level to reduce the consumer's expected after-sales-support-related disutility and induce them to buy the product. If the manufacturer or the retailer provides after-sales support, consumers expected after-sales-support-related disutility is smaller (because $δ > r$ ). Therefore, channel members’ incentive to set presales service also becomes smaller. As a result, when $δ$ is sufficiently small, $λ_{M} + λ_{R}$ is highest for the channel configuration in which after-sales support is provided by third-party providers.

Surprisingly, the demand for after-sales support can be the highest in the service configuration in which the highest level of presales service (the objective of which is to reduce the need for after-sales support) is provided to the consumers. Specifically, if consumers value presales service highly ( $k + r > \frac{1}{3}$ ) but it is very costly to provide ( $h > \hat{h}$ ), both the presales service ( $λ_{M} + λ_{R}$ ) and the demand $D^{a}$ for after-sales support are highest in the service configuration in which the manufacturer provides only presales service but the retailer provides both presales service and after-sales support. Because a higher level of presales service induces more consumers to buy the product, the total number of consumers seeking after-sales support may increase even though a smaller proportion of consumers seek after-sales support. This effect is particularly strong when consumers value presales service highly but it is costly to provide.

Extensions and Robustness of Results

In this section, we demonstrate the robustness of our main results by studying alternative channel service configurations in which (1) coprovision of presales service is not possible and (2) the manufacturer considers sharing a proportion of the retailer's presales service cost.

Noncoprovision Model

In some situations, directly investing in presales service may not be desirable or feasible for both channel members due to the associated coordination issues and the possibility of consumers receiving conflicting information. In this section, we consider an alternative model in which presales service is provided by either the manufacturer or the retailer, but not both. Similarly, after-sales support is also provided by either the manufacturer or the retailer, but not both. In addition, we assume the fixed cost $F = 0$ , which simplifies the analysis and allows us to examine the robustness of results using several extensions of this model. The manufacturer moves first and makes channel service and wholesale price decisions. Next, the retailer provides channel services not provided (if any) by the manufacturer and sets the retail price. Other assumptions are the same as the main model. We refer to this model as the “Noncoprovision Model.” The following proposition presents main insights that originate from the comparison of service configurations possible in this setup. The proof is in the Appendix, and a detailed derivation of expressions in each configuration appears in Web Appendix A. For ease of presentation, we define a threshold $\tilde{h}$ in the Appendix.

Proposition 4:

Among the RR, RM, MR, and MM configurations,

The level of presales service is the highest in RR configuration;

The demand $D^{a}$ for after-sales support is also the highest in the RR configuration, if $k + r > \frac{1}{3}$ and $h > \tilde{h}$ ; and

In equilibrium, the retailer providers both presales service and after-sales support (RR configuration). Both the manufacturer's and the retailer's profits are highest in the equilibrium RR configuration.

The presales service is more effective at increasing consumer demand when it is provided by the retailer. The reason is that if the manufacturer provides presales service, it sets a higher wholesale price, which drives retail price higher and demand lower. However, if the retailer provides presales service, the manufacturer induces the retailer to set a high presales service by setting a low wholesale price, which drives retail price lower and presales service higher. Both of these forces act to increase consumer demand. As a result, presales service is relatively higher when it is set by the retailer. Because providing after-sales support increases any channel member's incentives to provide presales service, $λ^{RR} > λ^{RM}$ . Therefore, the level of presales service is the highest in the RR configuration. Similar to Proposition 3b, the demand for after-sales support can also be the highest in the RR service configuration, in which the highest level of presales service is provided to the consumers. The intuition is the same and is therefore not repeated.

Similar to Proposition 1, where given a small F, the retailer chose to provide both presales service and after-sales support, in equilibrium the retailer provides both presales service and after-sales support (RR configuration). Further, the RR configuration yields the highest profits for both the manufacturer and the retailer. The intuition is as follows. The manufacturer sets the wholesale price at the lowest level in the RR configuration among the four service configurations. This lower wholesale price encourages the retailer to set the presales effort at the highest level, which results in demand at the highest level. The combination of this high demand and the fact that the retailer bears the cost of providing after-sales support results in the highest profits for the manufacturer in the RR configuration despite a low wholesale price. Because the retailer's effective margin is also the highest, it is straightforward that the retailer's profit is the highest in the RR configuration. Therefore, the RR configuration is the most desirable to both the manufacturer and the retailer, among all the four possible configurations.

Noncoprovision model with asymmetric costs

Cost asymmetries may arise due to a variety of reasons. For example, they may arise if the manufacturer has better knowledge about product features and capabilities than the retailer (as is the case with Apple, Samsung, and Intuit). Here, we present our findings on the effects of asymmetry between the manufacturer and the retailer (in parameters k, r, and h) on the equilibrium service configurations. The existence of the RR configuration as the equilibrium over a wide parameter space demonstrates the robustness of our main results. However, as expected, we find that a sufficiently large cost asymmetry can result in the optimality of other service configurations. For example, if providing presales service is sufficiently inefficient for the retailer, the manufacturer provides it. The conditions for the existence of alternative service configurations (MR, RM, and MM service configurations) in the entire range of cost asymmetries are derived and graphically presented in Web Appendix B.

Noncoprovision model with retail competition

We examine channel members’ incentives to provide presales service and after-sales support in the presence of retail competition. We find that even in the presence of retail competition, the RR configuration constitutes the equilibrium. Competition between retailers puts upward pressure on presales service levels and downward pressure on retail prices. In addition, although the RR configuration continues to remain the most attractive service configuration for the manufacturer, it may not be the most attractive option for the retailer, particularly when retail competition is intense. Web Appendix C presents the formal analysis of the noncoprovision model with retail competition.

Other noncoprovision model extensions

We present additional extensions of the noncoprovision model in Web Appendices D–G and show the robustness of results to alternative assumptions. First, we examine a model extension in which the presales service provider also incurs a variable cost s and show all the main results continue to hold qualitatively. Second, we consider a scenario in which some consumers receive presales service but do not buy the product. Third, we find that our results are robust to an exponential demand function $D = e^{- β p - (1 - λ) r}$ , where $β > 0$ . Finally, we consider alternative specifications for after-sales-support demand and show (numerically) that the RR configuration can be an equilibrium.

Cost Sharing for Presales Service

As noted in the Ford example, a manufacturer may share the retailer's cost of providing presales service instead of directly investing in it. In this section, we analyze a model in which the manufacturer chooses whether to provide presales service itself or let the retailer provide it and share a proportion $\hat{ϕ}$ ( $\hat{ϕ} \in [0, 1]$ ) of the retailer's cost. The after-sales support is provided by either the manufacturer or the retailer and $F = 0$ . We use the notation $(\hat{\cdot})$ to denote variables for cost-sharing service configurations. Note that the manufacturer's sharing of presales service cost is relevant only when the retailer provides presales service (i.e., in the RR and RM configurations). We refer to these service configurations as the cost-sharing RR and cost-sharing RM configurations. The timing of decisions is as follows. First, the manufacturer sets wholesale price $\hat{w}$ and decides whether to provide presales service ${\hat{λ}}_{M}$ or to share a proportion $\hat{ϕ}$ of the retailer's presales service cost. In addition, the manufacturer decides whether to provide after-sales support to consumers. Next, the retailer sets retail price $\hat{p}$ and presales service ${\hat{λ}}_{R}$ (unless the manufacturer chose to provide ${\hat{λ}}_{M}$ ). If the after-sales support is not provided by the manufacturer, the retailer also provides after-sales support. Consumers make purchase decisions and seek after-sales support, if needed. Finally, payoffs are realized. Other assumptions are the same as in the main model.

The formal statements of results, their proofs, and intuitions appear in Web Appendix H. Here, we highlight key findings. We find that in the RR configuration, cost sharing by the manufacturer helps increase the manufacturer's profits but, surprisingly, reduces the retailer's profits. The reduction in the retailer's profit is primarily driven by an increase in the retailer's investment in providing presales service (in spite of cost sharing by the manufacturer) and a higher wholesale price that the manufacturer sets when sharing the cost of presales service. In addition, we find that the manufacturer offers a more generous cost-sharing contract when it, instead of the retailer, provides after-sales support (i.e., in the RM configuration). The objective of this generous cost-sharing contract is to reduce the need for the manufacturer's after-sales support (especially when the cost of such services is high). Consequently, in the RM configuration, the cost-sharing contract may now benefit both channel members. In the presence of cost-sharing considerations, the channel service configuration in which the retailer provides both presales service and after-sales support and the manufacturer shares a proportion of the retailer's presales service cost constitutes the equilibrium. However, the same configuration without cost sharing generates the highest overall channel profits.

Conclusion

Consumers may need help using information-intensive products after purchase. Presales service (e.g., product demonstrations) can reduce the likelihood that they will need after-sales support. In this article, we study channel members’ incentives to provide presales service and after-sales support. We examine three types of channel service arrangements: (1) the main model, in which the manufacturer and the retailer can coprovide presales service; (2) the noncoprovision model, in which presales service is provided by either the manufacturer or the retailer; and (3) the cost-sharing model, in which we also allow the manufacturer to share the retailer's cost of providing presales service. After-sales support is provided by the manufacturer or the retailer.

We find that, in the equilibrium of the main model, both channel members provide strictly positive levels of presales service. Which channel member provides after-sales support depends on the fixed cost associated with providing effective after-sales support. If the fixed cost is sufficiently small, the manufacturer lets the retailer provide after-sales support. However, if it is larger than a threshold, the retailer becomes unwilling to provide after-sales support. In this case, the manufacturer steps in to provide after-sales support. As expected, if the fixed cost is too large, neither the manufacturer nor the retailer invests in providing after-sales service. We also find the presales service is generally low when the manufacturer provides after-sales support. In addition, both the presales service received by consumers and demand for after-sales support can simultaneously be very high when the retailer provides after-sales support.

If coprovision of presales service is not possible and the fixed cost of providing after-sales support is sufficiently small, the retailer provides both presales service and after-sales support. The result is driven by the fact that if the retailer is responsible for both services, presales service is set at the highest level. This high presales service induces a large number of customers to buy the product. The implication is that the channel configuration in which the retailer provides both the presales service and the after-sales support is most desirable to both channel members. Similar to the coprovision setup, we find that although presales service, which reduces the consumers’ need to seek after-sales support, is provided at a higher level than any other service configuration, consumers show up in the largest numbers to seek after-sales support in this configuration.

Anecdotal evidence suggests that manufacturers, in some cases, share the retailers’ cost of providing presales service. We consider a model in which cost sharing occurs between the manufacturer and retailer in providing presales service. We find that if both presales service and after-sales support are provided by the retailer, cost-sharing by the manufacturer helps increase the manufacturer's profits but reduces the retailer's profits. However, in situations in which the manufacturer provides after-sales support, a cost-sharing contract may benefit both channel members. We find that in the presence of cost-sharing considerations, the channel service configuration in which the manufacturer shares the retailer's cost of providing presales service and the retailer provides both presales service and after-sales support constitutes the equilibrium. However, the same configuration without cost sharing is the most desirable from the overall channel perspective.

Our findings have several implications for managers. Our findings suggest that if the fixed-cost investment needed to provide effective after-sales support is sufficiently small, the retailer should provide after-sales support. If channel members are able to coprovide presales service, doing so is more desirable than only the retailer providing presales service. In cases in which coprovision is not practical, the retailer providing both presales service and after-sales support is better from the demand-generation perspective. Note that other channel configurations may be optimal in real-world settings. For example, if the manufacturer is more efficient in providing any specific channel service, it would be optimal for it to provide that type of service to consumers. Finally, if the fixed-cost investment needed to provide effective after-sales support is not sufficiently small, the retailer may be unwilling to provide any channel services. In this case, channel services may be provided only by the manufacturer or may be outsourced.

Future research could explore several possible extensions. Extending our model to a competitive setting, for example, where two manufacturers sell substitutable products to the same retailer, would be interesting. Future research could also consider a principal–agent model in which the demand can be stochastic for given service levels and the manufacturer may offer an incentive contract to induce the retailer to provide one or both types of channel services. Another possible direction could be to assume that the level of after-sales support is the provider's private information and to examine whether higher presales service can increase consumers’ expectation of after-sales support.

Footnotes

Appendix

Acknowledgments

The authors thank the JMR review team; Weining Bao; Jessie Liu; seminar participants at Boston College, George Mason University, and Southern Methodist University; and conference participants of the 2018 DSI Annual Conference, 2019 POMS conference, and 2019 INFORMS Annual Meeting for valuable comments on the article. Authors are listed alphabetically.

Associate Editor

Wilfred Amaldoss

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Haresh Gurnani's work was partially funded by the Thomas H. Davis Chair at the Wake Forest University.

ORCID iD

Shubhranshu Singh

Online supplement:

Notes

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