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Some friends of mine run a small business, in a small garage-like space, with a few employees, making and selling "plumbuses". The typical customer orders about 5 plumbuses at a time. When I heard that they have received inquiries for large orders of plumbuses (500, for bulk discount) and have consistently declined, I was confused. I strongly believe that they have the capacity to satisfy both small and large orders, in terms of production. Their reason for declining large orders was something along the lines of "...but each plumbus could be sold for more when we do the smaller orders". "Well, yes, but then you can make more plumbuses", is my response. Their thinking may apply to limited production items, whereas there are plenty of plumbus ingredients (dinglebops, schleem, etc) on the market where their small business will have no impact on the supply of the ingredients.

Surely there is an equation that they can use to satisfy their desired profits and fulfill these bulk orders. With my limited economics experience (some high school and college courses), I would imagine something like the following:

a(x) = price of producing, packing, shipping x plumbuses

b(x) = desired profit from selling x plumbuses at once

f(x) = a(x) + b(x)

...where the price of making x plumbuses falls on some curve, since making (and mostly packing/shipping) many at once is cheaper than processing one at a time, and the desired profit from an order of x plumbuses falls on another curve where each additional plumbus contributes some marginal profit.

I would like to express my ideas to my friends to help them succeed as a small business. The friend who is actually most opposed to fulfilling the bulk orders has a degree in Economics, so I would like to have some legitimacy in my pitch, backing up my position with real terms, equations, sources, and eventually, real numbers.

What are the terms and equations that I am thinking of but cannot put a name to, and what resources can be recommended so that I can more informed of this topic?

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  • $\begingroup$ Optimal pricing conditions are independent of the customer type. However, wholesaling potentially cuts down on production costs (maybe the wholesale order allows a firm to purchase inputs in bulk at a discounted rate?). Account for this in your pricing model and then proceed as normal. $\endgroup$ – 123 Sep 7 '18 at 0:57
  • $\begingroup$ @123 It should be noted that there are some conditions where pricing schemes should take into consideration differences in consumer type. I'd recommend Conner look into "Second Degree Price Discrimination" (which specifically describes optimal conditions for things like bulk ordering as one of the special cases). What's perhaps most important is to understand who the "typical" consumer vs the "bulk-type" consumers are, and to answer some fundamental questions. For example: If the bulk purchasers aren't given a discount, do they still purchase the same quantity, just at the higher price? 1/ $\endgroup$ – AndrewC Sep 7 '18 at 11:23
  • $\begingroup$ If they end up buying fewer, how many fewer (depending on these answers, if demand is sufficiently inelastic, then bulk pricing might decrease profits, but it really depends on the specific values of the answers). Additionally, what are the bulk purchasers doing with the additional units? Would they just be using them for their own use, or reselling them? If it's resale, are they targeting consumers who would otherwise buy from your friends directly, or is it increasing the total market of the product? Finally (at least for these comment purposes), does the usage of the product change based 2/ $\endgroup$ – AndrewC Sep 7 '18 at 11:27
  • $\begingroup$ on quantity purchased and/or ease of getting more? (A personal anecdote to illustrate the last point: a friend once bought me a "Romulan Ale" energy drink as a part of a birthday present. Because of the novelty factor and the price and difficulty of buying more where the friend did, I initially held off on consuming it for fear of wasting the opportunity. Only once I found a bulk seller on Amazon did I purchase more and actually consume them with any regularity- without the bulk purchasing option, I would have chosen not to purchase any additional units). Hope some of that helps! 3/3 $\endgroup$ – AndrewC Sep 7 '18 at 11:31
  • $\begingroup$ I guess I was not clear. You are talking about a method by which consumers self-differentiate by selecting into certain purchasing schemes. $\endgroup$ – 123 Sep 7 '18 at 14:51

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