When less is more: Recovery technology investment and segmentation for uptime-centered services

In this paper, we investigate the interplay between technology cost and consumer heterogeneity when a supplier optimizes an uptime-centered service portfolio and its operation schedule simultaneously. In the model, the supplier serves customers segmented by heterogeneous valuations for uptime with pooled capacity. The supplier needs to invest in failure recovery technology to increase the failure recovery rate and provide differentiated uptime levels to customers in different segments. If the customers’ preference is unobservable, customer self-selection has to be enforced and cannibalization can be an issue due to information asymmetry. We show that joint optimization of technology investment and segmentation strategies leads to several nontrivial results that differ from traditional product line design theory. First, capturing fewer customers rather than more can lead to higher payoffs for the supplier under certain conditions moderated by the information structure. Second, higher technology cost can lead to lower investment, but a higher resulting average uptime. When heterogeneity is large, the average uptime under asymmetric information can be higher than that under full information. Third, when segment dissimilarity increases, mitigating cannibalization can make the high-end customers better off, even if they must pay a higher price for a lower uptime. The insights derived from the model are robust to various payment schemes and the structure of the failure recovery system.