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Value based pricing: Marginal utility decreases for the customer. oFirst glass of the water is the most valuable when you are thirsty. Indicator of price sensitive customers: These customers buy in big quantities.oCostco customers are more price sensitive than Target customers.
Page14utdallas.edu/~metinTwo Discounting SchemesCost/Unit$3$2.96$2.92Purchase Quantity5,00010,000Purchase Quantity5,000 10,000Total CostAll-unit quantity discount–Discount is applied to everyunitCost/Unit$3$2.96$2.925,00010,0005,000 10,000Total CostMarginal-unit quantity discount, orIncremental quantity discount–Discount is applied to additional unitsOther uses of discounting schemes are in OPRE 6366 Supply Chain Management.Purchase QuantityPurchase Quantity
Page15utdallas.edu/~metinDecreasing Marginal Value of Number of CPA Certified EmployeesCPA is a common accounting certification. A community college offers CPA classes for companies at the premises of the companies. This is convenient for the personnel of the companies.A certain bank has 50 employees at the level of associate, manager and senior manager, assistant director who consider taking the CPA classes if they are offered at the bank’s premises. The accounting personnel at the level of director and above already have a CPA. The utility of the CPA class for employees are not the same.–An assistant director requires a CPA to be promoted to be a director so the utility of the CPA class is high for him/her. –Associates can be promoted all the way up to an assistant director over time without a CPA so the utility of the CPA class is low for them. –The community college estimates the utility of the class to range uniformly over $0-$2500 for the employees. Using the number of employees interested in CPA and its utility estimate, the community college forecasts the demand to be D(p)=50(1-p/2500)=50-p/50. Revenue R(p)=50p-p2/50 so the revenue maximizing price is found from solving 50-p/25=0 and it is $1250.
Page16utdallas.edu/~metinCost of CPA Class by anMarginal-unit DiscountingWith the price of $1250 per employee, 25 bank employees take the CPA class. Community college makes a revenue of $31,250 by offering classes at the premises of the bank. For the community college, the cost of offering class to 25 or to 30 people is identical. The college computes that if the price were $1000, 30 people would take the course. This gives a revenue of only $30,000.To obtain more than the revenue of $31,250 and to enroll 30 people, the college offers a volume discounting scheme:–Each of the first 25 people pay $1250–Each additional person pays $1000.This discounting scheme provides the bank with an additional revenue of $5000, represented by the red box on the left. pD(p)=50-p/50250050125025Revenue$31250pD(p)=50-p/50250050100025Revenue$31250125030
Page17utdallas.edu/~metinMarket Segmentation vs. Volume DiscountingIf all we are doing with both market segmentation and volume discounting is inserting boxes under the demand curve, can we apply both in the same buyer-seller context?