A price for every customer by Bob Scarlett (Financial Management, November 2005)Answer to question...
The key point to note is that the charge out rate differences do not reflect differences in thecost of serving different c...
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Price discrimination nov 05 answer

Published on: Mar 4, 2016
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Transcripts - Price discrimination nov 05 answer

  • 1. A price for every customer by Bob Scarlett (Financial Management, November 2005)Answer to question posed in articleYou were tasked with the following challenge:Imagine you are the marketing manager of a professional consulting firm. Customers arecharged, by industry convention, on the basis of an hourly charge out rate for consultant time.How might you go about maximising the revenues of the firm through the practice of pricediscrimination?.An outline answer follows:Rather than charging out consultant time on the basis of a uniform amount for all jobs and allcustomers, a pricing structure might be adopted.(1) Customers in some business sectors may be willing to pay higher prices than in others. For example, the petroleum and banking sectors are widely considered to be less sensitive to personnel related costs than other sectors and hence they may be charged a premium rate. At the other extreme, the charity and not-for-profit sectors may be charged a discounted rate(2) The issue of charge out rates may be more sensitive the larger is the size of the job. Hence, a large job involving more than, say, 1,000 hours of consultant time may be charged at a discounted rate.(3) Customers in some parts of the country may be more price sensitive than in others. So, it may be possible to charge a premium London rate and a lower ‘country’ rate.(4) If a particular client is serviced on a regular and continuing basis then it may be appropriate to agree to a discounted rate or a fixed charge per period plus a very sharply discounted hourly rate.(5) The practice manager may be given discretion to negotiate variations in the charge out rate according to his assessment of a client’s circumstances. A keen or ‘distressed’ client can be charged a premium rate. A distressed client is one who requires immediate and important work to be carried out – for example, where a factory has stopped working because of a major equipment failure.A professional practice may adopt a charge out rate structure along the following lines :Practice Charge Out RatesLondon rates, £ per hourSector : 0-500 hours 501-1,000 hours 1,000 hours +petroleum / banking 220 180 170other 200 160 150charity / NFP 180 140 110Country rates, £ per hourSector : 0-500 hours 501-1,000 hours 1,000 hours +petroleum / banking 190 175 170other 180 155 140charity / NFP 160 130 100 -1 –November 2005
  • 2. The key point to note is that the charge out rate differences do not reflect differences in thecost of serving different clients. A consultant will be paid the same salary regardless of whattype of job or client he/she is working for.The charge out rate structure of a professional practice is likely to be considered highlyconfidential and its contents may not be known to most staff. Its very existence may besomething that the practice may not wish to be common knowledge.end -2 –November 2005

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