Retail Management 12th Edition by Barry Berman ,Joel Evans

Exercise 18

Case 1: The Costco Mindset: Appealing to Consumers' Interest in Quantity Discounts
A major issue for many retailers is determining the quantity discount level to offer consumers that maximizes profits. The use of such discounts is central to the pricing strategy of membership clubs that often strap multiple cans and bottles of the same brand together. It is also important for supermarkets to examine their quantity discount strategy to combat lost sales from membership clubs and supercenters.
To manufacturers, quantity discounts encourage loyal customers to stock up on their brands. This approach may discourage consumers from purchasing competing brands during a time when their homes are amply stocked. To retailers, quantity discounts increase sales volume. Often, the value of the quantity discount offered to consumers is based on the retailers' lower wholesale costs. As an alternative to large package sizes, consumers may prefer purchasing multiple quantities of smaller package sizes versus one larger size due to perishability concerns.
Using advanced statistical analysis, two researchers developed a mathematical model that uncovers how consumers modify their purchase decisions for goods and services based on the quantity discounts offered. This model enables retailers to study the effect of quantity discounts on sales and profits without the need for costly and time-consuming experiments or trial-and-error pricing tactics. According to the researchers, the logic behind quantity discounts is based on the average consumer's obtaining diminishing satisfaction from each additional unit purchased. As a result, consumers are less willing to pay the same price for additional units as for prior units purchased at the same time.
The research model was based on an online movie rental business with two scenarios: no competition and competition. Using a sample of 250 consumers, subjects were offered different monthly pricing plans for movies based on the number of movies they wanted to view at a time. The level of the discount was varied to allow the researchers to determine the optimal price levels for the rental firms.
The study found that the price consumers were willing to pay for DVD rentals declined after renting the first DVD and took a major price drop on additional units thereafter. The researchers saw that DVD rental retailers must offer dramatic discounts to retain customers interested in renting two or more DVDs. Based on these findings, the hypothetical movie rental firm would maximize profit at a monthly fee of $13 for a one-DVD-at-a-time plan, $23 per month for a two-DVD plan, and $31 for a three-DVD plan-assuming no competition. A second model looked at optimal pricing that reflected competition from both Netflix and Blockbuster. Under this scenario, the profit maximizing price would be $8.22 per month for a one-DVD-at-a-time plan, $12.69 for two DVDs, $16.40 for three DVDs, and $21.82 for a four-DVD plan.
The retailer's brand name and the product's features both had an impact on the price that consumers were willing to pay. Consumers would be willing to pay a price premium of $1 per month for Netflix over Blockbuster and about 65 cents more for a Blu-ray alternative.
Questions
1. Discuss the pros and cons of quantity discount-based promotions from a manufacturer's perspective.
2. Describe the pros and cons of quantity discount-based promotions from a retailer's perspective.
3. Explain the concept of diminishing satisfaction with each additional unit consumed.
4. Evaluate the applicability of these research findings to a membership club such as BJ's.