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Old 01-14-2013, 03:53 PM   #16
moxieman99
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I've read the price discrimination link posted by johnsfine. It is perfectly true, but has nothing to do with bulk sales per se. It has to do with elasticity of demand.

Remember, prices are set by what the market will bear, not costs. If the market clearing price is below what your costs are, you will incur a loss. Bulk sales allow you to move the product quickly, and at a lower unit cost. That allows you to eke out a profit, or minimize your losses.

Sorry johnsfine, but it isn't a question of "fitting" price to cost. Price is determined by the market. Cost is determined by your purchasing (thereby capturing economies of scale of production) and your operations and the efficiency of your operations. Profits and losses are determined by the differences between prices and costs.
 
Old 01-14-2013, 04:34 PM   #17
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Quote:
Originally Posted by moxieman99 View Post
I've read the price discrimination link posted by johnsfine. It is perfectly true, but has nothing to do with bulk sales per se.
It is the primary motivation for most bulk sale pricing.

The seller expects/hopes that those customers willing to buy in bulk include a larger relative fraction of customers unwilling to pay the higher single unit price.

Quote:
Remember, prices are set by what the market will bear,
Only when you must dispose of fixed production or fixed pre orders.
Otherwise, prices are set to select a point on the demand curve at which you hope profit will be maximized. Demand for most products is elastic, so there is no specific price "the market will bear". There are a range of prices that will yield a range of sales volumes.

Quote:
Bulk sales allow you to move the product quickly, and at a lower unit cost.
That is exactly what I meant by "fitting" (not "matching") price to cost.

Quote:
Sorry johnsfine, but it isn't a question of "fitting" price to cost.
You are contradicting yourself. You just aren't seeing how that fits together.

To the extent that bulk sales reduce your cost per unit, you may be motivated to price bulk sales at a lower price per unit. You are using the lower price to motivate your customers to buy in bulk rather than individually. You want your customers to buy in bulk because that costs you less per unit. That is fitting price to cost. You are setting a relatively lower price for bulk vs. single because your cost is lower for bulk vs. single.

All that is a minor reason why vendors offer bulk discounts. The major reason is price discrimination.

Imagine some of your potential customers are willing to pay up to $2 per unit for a product that cost you $1 per unit, while a slightly smaller pool of additional customers are only willing to pay only up to $1.50

You are selling the product for $2 per unit and consider increasing sales by cutting the price to $1.50. That would cut your profit per item in half and less than double your volume. It probably doesn't make sense.

But what if you kept the $2 per unit price, but also offered them at $18 per dozen. Imagine half of your potential $2 customers were willing to buy a dozen at a time (but proportionately less often for the same total sales over time per customer). You just lost 25% of your profit because of those customers. But imagine 75% of the potential customers who would only buy at $1.50 or less are willing to buy a dozen at a time. That adds an amount slightly over 35% of your original profit, so you have increased profit by 10% by offering the bulk discount.

But what made that work? It is because we project only 50% of the less price sensitive customers are willing to buy in bulk, but 75% of the more price sensitive customers are willing to buy in bulk. Why would that be?
One simple reason is that some customers already wanted a large number. Since they want a large number, the unit price matters enough to select between you and your competitor based on price. If they wanted a small number, it isn't worth their time to compare prices or keep track of relative prices.
Another reason is that there is inconvenience to the bulk purchase for most customers and customers who are more price sensitive will usually be less convenience sensitive.

I expect you may point out the possibility of improving your cost from your supplier by increasing your volume. But that argues much more in favor of simply lowering your price to increase sales volume rather than offering a bulk discount.

There is still the transaction cost savings from the bulk discount. But in most sales situations that is minor compared to the potential to segment your demand curve and gain more from price sensitive customers than the same discount loses from less price sensitive customers.

Last edited by johnsfine; 01-14-2013 at 04:37 PM.
 
Old 01-14-2013, 04:49 PM   #18
moxieman99
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Quote:
Originally Posted by johnsfine View Post
It is the primary motivation for most bulk sale pricing.

The seller expects/hopes that those customers willing to buy in bulk include a larger relative fraction of customers unwilling to pay the higher single unit price.

Only when you must dispose of fixed production or fixed pre orders.
Otherwise, prices are set to select a point on the demand curve at which you hope profit will be maximized.
Prices are set by the retailer at the maximum profit on the demand curve only initially. Once the market has told the retailer that he will not get that price (or could get more), then his price will move.

You can set your price to your maximum profit point all day. If the market dictates that it must be another price, you will either not sell, or sell out of your stock of goods. DESIRED prices have nothing to do with market prices.

Typical rookie mistake. You'll catch on eventually.
 
Old 01-15-2013, 03:18 AM   #19
AnanthaP
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See basically trade is credit.

The distributor pays the manufacturer to take products out of the warehouse. In turn, the distributor dumps it on the retailer and collects for the quantity dumped. So retailer is forced to dump it on the customer.

Within this there are of course customers who will
(a) buy in bulk anyway but keep the expiry date in mind,
(b) buy on impulse,
(c) buy for an offer - whether they need it or not.

The retailer needs to rotate his cash around fast.

Apart from this, there is of course the cost of packaging, storing odd lots etc.

OK
 
Old 01-15-2013, 06:54 AM   #20
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Quote:
Originally Posted by moxieman99 View Post
Prices are set by the retailer at the maximum profit on the demand curve only initially. Once the market has told the retailer that he will not get that price (or could get more), then his price will move.

You can set your price to your maximum profit point all day. If the market dictates that it must be another price, you will either not sell, or sell out of your stock of goods. DESIRED prices have nothing to do with market prices.

Typical rookie mistake. You'll catch on eventually.
I still don't quite think you've grasped what johnsfine's saying... Your analysis is completely correct, but also completely theoretical. In the real world, it is not the case that everyone is willing to pay the same price for something. Being a poor student, I will want to pay the minimum I can for something, while a richer person might be willing to pay more for something a bit better quality.

So (e.g.) Sainsbury's, in order to maximise profit, won't set their price at the maximum dictated by the market, but will divide the pricing of their items so that they have a crappy but cheap option (i.e. Sainsbury's basics range) designed to get the people who are willing to pay a bare minimum for something, and a more expensive option (normally an established brand name) designed to get more money from people who are willing to pay more. By splitting their pricing strategy, they've got more money than they could ever have done with a single price.

Obviously, I have been talking about quality of items, not quantity of items. But the same analysis applies: they offer a lower price to people who are willing to go to the extra effort of storing large quantities of items (and offering the store all the benefits previously mentioned in the thread), and charging a higher price (per unit) to the people who are a bit more price-blind, or less willing to go to the effort of storage or just unable to do the maths.
 
Old 01-15-2013, 08:29 AM   #21
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Quote:
Originally Posted by resetreset View Post
What is Costco? And Market Basket? Why're you guys assuming that everyone here is American?
Quote:
Originally Posted by Snark1994 View Post
So (e.g.) Sainsbury's, in order to maximise profit, won't set their price at the maximum dictated by the market, but will divide the pricing of their items so that they have a crappy but cheap option (i.e. Sainsbury's basics range)
I just hate it when people assume everyone here is from the UK and expect us to know what Sainsbury's is

But anyway, thanks for the assist in explaining the real topic.

Even with the official link
http://www.sainsburys-live-well-for-...values/basics/
I can't quite tell from a distance what "Sainsbury's basics" really is. I just have a guess:

The big retail chains here have "house brands", which means a secret agreement with with some major brand manufacturer in each product category, for that major manufacturer to make the product, but package it as the retailer's house brand and sell it to the retailer for less than the brand name product, so the retailer can sell to the public for less. The retailer must try to keep secret the identity of the major brand to avoid "cannibalizing" the market of the major brand.

That is a very good example of "price discrimination", but it is actually price discrimination by the major brand manufacturer more than it is by the retailer.

The manufacturer might find some ways to cut costs and produce a slightly lower quality product to package as house brands. But most often, manufacturing economies of scale mean that it is least expensive to manufacture all the product the same. So only the packaging is different.

As long as most of the public expects a small quality difference (which sometimes is there), the manufacturer can reach consumers unwilling to pay full price without losing too many of those who would have been willing to pay full price.

Last edited by johnsfine; 01-15-2013 at 08:41 AM.
 
Old 01-15-2013, 09:45 AM   #22
moxieman99
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Quote:
Originally Posted by Snark1994 View Post
So (e.g.) Sainsbury's, in order to maximise profit, won't set their price at the maximum dictated by the market, but will divide the pricing of their items so that they have a crappy but cheap option (i.e. Sainsbury's basics range) designed to get the people who are willing to pay a bare minimum for something, and a more expensive option (normally an established brand name) designed to get more money from people who are willing to pay more. By splitting their pricing strategy, they've got more money than they could ever have done with a single price.
Absolutely true, but what you've done is create different markets. Within each market, what I said applies. There is a market for high end quality widgets, one for medium, and one for low. Within each market (or market segment), Sainsbury will initially set its price at the profit maximizer point. Once the market price is known, however, Sainsbury WILL move its price off that profit maximizer point to the market price. In order to maintain profits (or minimize the hit), Sainsbury will look for costs that it can control. Specifically, transaction costs. Since the transaction costs for ringing up one apple is the same as for ringing up 10, Sainsbury (particularly for a perishable asset) will encourage bulk sales of apples. The sales, however, will NOT occur at Sainsbury's initial profit maximizing price. The sales WILL occur at the market price, Sainsbury's costs (and profits) be damned.

A store that sets its market as the bulk sale market (Costco, WalMart, in America) will not necessarily have variations in sales that overwhelm costs, which is what johnsfine tried to argue. Costco may have seasonal variations in sales levels, but not because it is selling in bulk, but because of other factors. Costco's market is the bulk sales market. Joe-the-greengrocer's market is the single-apple-purchase market. You will pay more at Joe's. Why? Higher transaction costs per unit (apple).

As I said: transaction costs and economies of scale explain why things are cheaper by the dozen, which was the original question. I and many others before me, pointed that out.

Last edited by moxieman99; 01-15-2013 at 09:47 AM.
 
Old 01-16-2013, 03:41 AM   #23
Snark1994
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Quote:
Originally Posted by johnsfine View Post
I just hate it when people assume everyone here is from the UK and expect us to know what Sainsbury's is
[...] Even with the official link
http://www.sainsburys-live-well-for-...values/basics/
I can't quite tell from a distance what "Sainsbury's basics" really is. I just have a guess:

The big retail chains here have "house brands", which means a secret agreement with with some major brand manufacturer in each product category, for that major manufacturer to make the product, but package it as the retailer's house brand and sell it to the retailer for less than the brand name product, so the retailer can sell to the public for less. The retailer must try to keep secret the identity of the major brand to avoid "cannibalizing" the market of the major brand.
Oops...

You're essentially right. The Sainsbury's basics range is just lower-quality food at cheaper prices - I don't know how they actually obtain it (maybe it's food which doesn't meet quality control guidelines at the brand names' factories?) but it's not as nice, and a hell of a lot cheaper. (for comparison, I think the cheapest non-Sainsbury's pasta is around £1.80/kg, whereas Sainsbury's basics is about £0.24/kg)

Interestingly, for XKCD fans, the packaging is not too dissimilar from https://xkcd.com/993/: picture
 
Old 01-16-2013, 07:54 AM   #24
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Quote:
Originally Posted by Snark1994 View Post
(for comparison, I think the cheapest non-Sainsbury's pasta is around £1.80/kg, whereas Sainsbury's basics is about £0.24/kg)
Am I converting correctly? That would be $1.31 per pound US down to $.17 per pound.

I guess pasta is really cheap there.
Market Basket house brand pasta is normally $1.00 per pound, but every few months is sale priced for a week or two at $.69 per pound, which is the only time I buy it. The cheapest non house brand pasta there is $1.49 and frequently on sale for $.89 and much worse quality than the house brand. I haven't compared the quality of the more expensive brand names, because I don't see anything wrong with the quality of the house brand. Costco (major brand) pasta in bulk packages is higher cost per pound and lower quality than Market Basket house brand (shopping at Costco saves money only if you know which products are actually good deals). Walmart house brand pasta is priced about the same as Market Basket, but also is lower quality.
 
Old 01-17-2013, 02:51 AM   #25
Snark1994
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sorry, I did get my facts completely wrong (either that or they've raised their prices from before Christmas): it's now £0.78/kg basics, and £2.40/kg non-basics ($0.57/lb and $1.75/lb respectively, by my calculations). But still, this is not a sale price, but an all-year-round price...
 
  


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