Optimization and analysis of the profitability of tariff structures with two-part tariffs

Service providers often offer tariff structures with several two-part tariffs that consist of a fixed fee and a usage price, such that consumers may pick the tariff they prefer. Prices of tariffs have significant impacts on service providers’ profit, because they simultaneously influence consumers’...

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Bibliographic Details
Published in:European journal of operational research Vol. 206; no. 3; pp. 691 - 701
Main Authors: Schlereth, Christian, Stepanchuk, Tanja, Skiera, Bernd
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.11.2010
Elsevier
Elsevier Sequoia S.A
Series:European Journal of Operational Research
Subjects:
Applied sciences
Exact sciences and technology
Firm modelling
Heuristic
Marketing
Marketing Pricing Two-part tariffs Mixed integer nonlinear programming
Mathematical programming
Mixed integer nonlinear programming
Nonlinear programming
Operational research and scientific management
Operational research. Management science
Optimization
Pricing
Pricing policies
Profit maximization
Profitability
Profits
Stochastic models
Studies
Tariffs
Two-part tariffs
Two-part tariffs
Mixed integer nonlinear programming
Pricing
Marketing
Profitability
Mixed integer programming
Non linear programming
Fees
Stochastic method
Optimization
Search algorithm
Stochastic programming
Heuristic method
Simulated annealing
Profit
Tariffication
Service Proposal
Gradient method
ISSN:0377-2217, 1872-6860
Online Access:Get full text
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Summary:Service providers often offer tariff structures with several two-part tariffs that consist of a fixed fee and a usage price, such that consumers may pick the tariff they prefer. Prices of tariffs have significant impacts on service providers’ profit, because they simultaneously influence consumers’ tariff choices and their usage. The number of tariffs also plays an important role, because more tariffs segment the market better but also increase the administrative burden and require more marketing effort. This article presents a mixed-integer nonlinear programming optimization problem to determine profit-maximizing tariffs; compares several heuristic search methods, in particular, the gradient method, stochastic search, and simulated annealing, to solve this problem; analyses the profitability of different tariff structures; and outlines the factors that drive differences in profitability across various tariff structures. The results show that especially for large samples of more than 100 consumers, simulated annealing performs best and deviates only 0.2% from the optimum. Structures with fewer two-part tariffs are generally sufficient, because additional two-part tariffs only negligibly increase service providers’ profit.
Bibliography:SourceType-Scholarly Journals-1
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ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2010.03.038