Evaluating the effectiveness of nonlinear pricing in the breakfast cereal industry

Nonlinear pricing is a term that looks at the relationship between price and quantity. Normally firms bundle breakfast cereals together and then sell them at least a price that is a third of the single unit price. This shows a lack of linearity between the price and the quantity. Most of the breakfast cereal brands like Kellogg’s , Post and others employ nonlinear pricing schedules as a way of motivating consumers to purchase their products. They use these methods to increase their product sales and boost profits respectively. An example of nonlinear pricing is when a consumer is given an option to buy two boxes of cereal and get and the third one for free.
According to Market Watch (10/08/2018), 85% of breakfast cereal brand companies use the nonlinear pricing model. This is a very popular and competitive market strategy used by other companies as well. The purpose of this thesis is to therefore evaluate the effectiveness of the nonlinear pricing strategy popular in the breakfast cereal industry, as well as ascertaining whether this strategy fosters loyalty amongst cereal consumers. I have always wondered if breakfast cereal companies that use nonlinear pricing models shortchange themselves by recycling their own customers instead of attracting new ones. To respond to that question, l used data from the breakfast cereal industry for the year 2017. This data received integrity research and assurance approval at Arizona State University . Moreover, the study used breakfast cereal data as the backbone of the analysis because consumption of breakfast cereals happens throughout the year and breakfast cereals have a longer shelf life. The data is based on receipt uploads from over 400,000 users of the Omni panel website. My goal with the thesis is to evaluate the effectiveness of nonlinear pricing schedules in relation to increasing sales and fostering customer loyalty. At the end of the study, l would like to have developed a strong and data-based opinion on why consumers choose the breakfast cereal they purchased and also on the relationship between nonlinear pricing and consumer loyalty. I hope to use my findings to propose a better model which, if used by these businesses, can enable them to generate more returns and cultivate customer loyalty.