The impact of revenue-maximizing priority pricing on customer delay costs

Abstract

Speed is an increasingly important determinant of which suppliers will be given customers' business and is defined as the time between when an order is placed by the customer and when the product is delivered, or as the amount of time customers must wait before they receive their desired service. In either case, the speed a customer experiences can be enhanced by giving priority to that particular customer. Such a prioritization scheme will necessarily reduce the speed experienced by lower-priority customers, but this can lead to a better outcome when different customers place different values on speed. We model a single resource (e.g., a manufacturer) that processes jobs from customers who have heterogeneous waiting costs. We analyze the price that maximizes priority revenue for the resource owner (i.e., supplier, manufacturer) under different assumptions regarding customer behavior. We discover that a revenue-maximizing supplier facing self-interested customers (i.e., those that independently minimize their own expected costs) charges a price that also minimizes the expected total delay costs across all customers and that this outcome does not result when customers coordinate to submit priority orders at a level that seeks to minimize their aggregate costs of priority fees and delays. Thus, the customers are better off collectively (as is the supplier) when the supplier and customers act independently in their own best interests. Finally, as the number of priority classes increases, both the priority revenues and the overall customer delay costs improve, but at a decreasing rate. © 2009, Decision Sciences Institute.