Margin Utility Applied!!

Most Companies use Human Behaviour and Psychology to the increasing their sales. Yes, it is possible by combining consumption behaviour with pricing. Here I discussed one of the methods of Margin Utility. If you like it, feel free to ask discount on consumption each time you visit nearby store.

Margin Utility is the economical concept where for each extra unit of production, how much cost involves is determined. Cost involves fixed costs and variable costs. From margin utility, we can obtain a function as additional cost for each additional units i.e., for each increasing unit of production how much cost is increasing? I hope you understand the Marginal Utility term.

Ct= Cf (Fixed Cost) + Cv (Variable Cost)

Now let us get to the consumption behaviour, More Consumption gives More Satisfaction but Diminishes Relatively i.e., consumption of the first chocolate provides more satisfaction than the second chocolate. Here satisfaction increases for the second chocolate but in terms of relative percentage, it diminishes. For easy understanding let me explain if consuming 1st Candy provides 10 units of satisfaction, then the second candy will provide 8 units of satisfaction while the 3rd candy provides 6 units of satisfaction. Here overall satisfaction at the 3rd candy (24-unit satisfaction) increases but diminished (diminished by 6 units) relatively.

Now we get to know how consumption behaviour works and how margin utility in production works. Does the real question arise how to implement it to increase sales?

The idea is to combine both concepts that pricing of product should be according to satisfaction so that people can consume maximum while producers utilize the benefits of increased production in variable costs only.

For Exa. A Laxmi Vada pav stall in Karad makes a daily sale of 100 Vada pav selling @15Rs/Vadapav. In Research it is found that 90-95% of Vada-pav are ate by a different consumer at a rate of 1 Vada-pav at a time. Now for increasing sales either we have to find new Customers who are willing to eat it at the normal rate of 1 Vada-pav/instant or either we will increase the normal rate of consumption from 1 Vada-pav to 2 Vada-pav at a time. We are focusing on increasing rate of consumption.

Yes, it is possible to increase using a pricing strategy according to consumer satisfaction. I applied here such a strategy from my calculated functions of cost and satisfaction. After analyzing the Laxmi Vadapav stall's cost function and satisfaction function, the new derived pricing strategy for the stall was

Pricing Strategy For 1st Vadapav= 15Rs, Total= 15Rs

For 2nd Vada-pav @ a time = 13Rs, Total= 27Rs (i.e., Discount of 10% to consumer)

For 3rd Vada-pav @ a time = 11Rs, Total = 38Rs ((i.e., Discount of 15.55 % to consumer)

How producer gets benefitted?

Here Lakshmi Vada-pav gets more orders at an instant time in a day where they have to increase variable cost only. In practical terms to understand Lakshmi Vadapav has to fry 2nd Vada-pav @ instant in same oil which is hot for 1st oil. So, either to waiting for normal rate eating customer Lakshmi centre converted same customer’s normal eating rate to 2 Vadapav @ a time by lucrative pricing without compromising profits.

How Consumer Welfare Increased?

Consumer gets more satisfaction by eating more while getting price according to satisfaction rather than mere multiplication of quantity and selling price. So enjoy your meals and breakfast and pay accordingly!!

Happy Reading!!

Digambar Mali

Active Analytical Thinker, Currently working on financial literacy.

Enthusiastic about Leadership and Psychology

Publicity Co-Ordinator Syncing.GCEK

Email | LinkedIn

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