Non-Linear Pricing

Reference – Marketing Analytics

Wayne L Winston
 Nonlinear pricing

• Nonlinear pricing is used in a situation in which the cost of

purchasing q units is not equal to the unit cost c per unit
times q. Bundling or Price bundling is a special type of
nonlinear pricing because the price of three items is not
equal to the sum of the individual prices
 Quantity Discounts – Nonstandard
Quantity discount
• Quantity discounts: If customers buy ≤CUT units, they pay high price (HP)
per unit, and if they buy >CUT units, they pay low price (LP) per unit. CUT
is simply the “cutoff point at which the charged price changes.” For
example, if customers buy ≤1000 units, you charge $10 a unit, but if they
buy more than 1000 units, you charge $8 per unit for all units bought.
This form of nonlinear pricing is called the nonstandard quantity
discount.
 Standard Quantity Discount

Another type of quantity discount strategy is as follows: Charge HP for

the first CUT units bought, and charge LP for remaining units bought.
For example, you charge $10 per unit for first 1000 units and $8 per
unit for remaining units bought. This form of nonlinear pricing is called
the standard quantity discount. In both examples the value of CUT =
1000.
 Two part Tariff

• Two-part tariff : The cost of buying q units is a fixed charge K plus $c

per unit purchased. For example, it may cost $500 to join a golf club
and $30 per round of golf.
 Demand Curve
q = 400 – p

q = quantity
p = price

p = 400-q

p= 400-20
P= 380
400= zero demand
380 = 1 unit
360 = 2 units

Customers’ willingness to pay for a unit of a product is often referred to

as the unit’s reservation price.
Profit maximization with nonlinear pricing
strategies
• Power company wants to determine how to maximise the profit
earned from a customer whose demand in kilowatt hours for power is
given by q = 20 – 2p. Cost of producing a unit of power is $2. First
assume linear pricing
20-2P=Q
-2P=-20+Q
2P=20-Q
P=10-Q/2