A system and method for determining the optimum price that a service provider should charge to customers of a periodic extended-product warranty to optimize profits generated from providing such warranties. In one aspect of the present invention the customer is allowed to elect or to cancel warranty coverage on a monthly basis which election is based in part on the customer's expected net utility from his coverage decisions. In one embodiment, the customer can be afforded complete warranty coverage flexibility in terms of his ability to turn coverage on and off whenever desired. In another aspect of the present invention the customer can be allowed to make dynamic repair or replacement decisions in each period based on the product's failure status or on other criteria. By properly modeling optimal extended-product warranty strategies from the perspective of both the customer and from the perspective of the service provider, one can compute the customers' maximum expected discounted net utility and the service provider's expected discounted profit from strategic customers.