Question

Consider the following couponing strategy for Kellogg’s Oat Bunches cereal. Suppose there are two types of consumers – the busy professionals (B) and the stay-at-home parents (S). There are 10 consumers of each type. B-type consumers are willing to pay $6 for a box of Kellogg’s cereals while the S-type consumers are willing to pay $2.50 for a box of cereals. But B-type consumers face a time/inconvenience cost of $2.50 of redeeming coupons while the S-type consumers face redeeming costs of $0.50. What should be Kellogg’s regular price and the value of the coupons for Oat Bunches? Compare Kellogg’s revenue from this couponing strategy to its revenue if it were to charge a single price for the cereal.

Answer 1

BUSY PROFESSIONALS:

No. of consumers =10

Willful payment = $6

Time/inconvenience cost = $2.50

Therefore, effective cost = 6+2.5 = $8.50

STAY-AT-HOME PROFESSIONALS:

No. of Consumers = 10

Willful payment = $2.50

Time/inconvenience cost = $0.50

Therefore, effective cost = 2.5+0.5 = $3

Therefore, the ideal cost should be $3.50 and redemption coupons of $1 should be provided. In this way, the B type consumers would be averse to redeem coupons as their expense of redemption is way greater than the redemption amount. On the other hand, the S type consumers would find it worthwhile to redeem coupons as their cost of redeeming is much lesser than the returns on redemption of coupon.

Thus, for the test group of 20 consumers, revenue would be= $3.50*20 - ($1*10)

= $60

which implies an average revenue of ($60/20 =$3) per consumer.