Seasonal peaks of demand are a common occurrence in many supply chains. Most retailers in the United States achieve a significant fraction of their annual sales during the month of December. One such example is Amazon. As a result of the seasonal peak, the requirement for picking and packing and transportation capacity at Amazon significantly increases. Bringing in short-term capacity is expensive and decreases Amazon’s margins. As discussed in Chapter 9, off-peak discounting is an effective method of shifting demand from the peak to the off-peak period. Amazon’s use of free shipping serves as an off-peak discount. Orders with free shipping arrive in time for Christmas only if they are placed well in advance. The price discount encourages some customers to shift their demand to early December or November, thereby reducing the December peak for Amazon and allowing it to extract a higher profit. Simultaneously, this strategy offers a price break to customers who are willing to order early.
Faced with seasonal peaks, an effective revenue management tactic is to charge a higher price during the peak period and a lower price during off-peak periods. The result is a demand shift from peak to off-peak periods. Such an outcome is beneficial if the discount given during the off-peak period is more than offset by the decrease in cost because of a smaller peak and the increase in revenue during the off-peak period. See Chapter 9 for a detailed discussion of the trade-offs involved when a firm uses pricing to deal with seasonal peaks.
The hotel industry uses differential pricing by day of week and time of year. Here, the goal is not to shift demand but to increase demand during periods of low demand by attracting price- sensitive customers, such as vacationing families, with a price discount. The Marriott Corporation has been quite successful in this effort. Demand for hotel rooms is known to vary by day of the week. For Marriott, which targets business customers, peak demand days occur in the middle of the week. Marriott offers lower rates on weekends to encourage families to use its hotels during that time. Another revenue management tactic that Marriott uses is to charge customers a lower rate if they stay over a longer period that also covers low-demand days.
An interesting example of peak pricing is the Next restaurant started by star chef Grant Achatz in Chicago in 2010. The restaurant sells advance tickets for seatings at different times. Ticket prices vary based on the menu but also on the time for which a customer signs up. Thus, a Saturday night seating at 8 p.m. is more expensive than a Tuesday night seating at 9:30 p.m. Similarly, many sports teams charge more for games involving popular opponents and less for weaker opponents and less popular times.
Off-peak discounting can be an effective revenue management tactic for owners of production or transportation capacity in any supply chain facing seasonal peak demand, because changing capacity over time is expensive. This tactic increases profits for the owner of assets, decreases the price paid by a fraction of customers, and also brings in potentially new customers during the off-peak discount period.
Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.
It’s really a nice and helpful piece of information. I am glad that you shared this helpful information with us. Please keep us informed like this. Thanks for sharing.
You’ve been really helpful to me. Thank you!
Thank you for writing such an excellent article. It helped me a lot and I love the topic.
I must say you’ve been a big help to me. Thanks!
I have to thank you for this article
You’ve been a great aid to me. You’re welcome!
I really enjoyed reading your post and it helped me a lot
You helped me a lot by posting this article and I love what I’m learning.
I enjoyed reading your piece and it provided me with a lot of value.