Rajeev Kohli

Package Sizes for the Bottom of the Pyramid

Coauthor(s): Oded Koenigsberg, Ricardo Montoya.

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Abstract:
In parts of the world, single-serve packages account for significant sales of such everyday products as bread, coffee, ketchup, cream and shampoo. These markets are characterized by two conditions: low transactions costs for buyers and sellers, and the presence of poor consumers who have unsteady income streams and can afford to only buy what they immediately need. We examine if the latter condition is necessary for a firm to make single-serve packages. We develop a model for a firm selling a product with a finite usable life to consumers with heterogeneous usage rates and reservation quantities, the latter being defined as the minimum quantity per dollar a consumer must obtain to purchase a product. We show that, even if there are no constraints on the income streams of buyers, a seller can charge higher unit prices and also sell a larger quantity of a product by making single-serve packages. The higher the unit cost of the product, the more salient the effect of single-serve packages on unit price. Sales volume simultaneously increases, provided the unit cost is not too low. A higher unit price therefore need not be a poverty penalty imposed on poor buyers, but a consequence of buyers being able to better match their purchases to their desired consumption. Less waste is not only socially desirable, it also leads consumers to pay higher unit prices and buy more of a product. These results are obtained if the cost of a package increases at a constant or increasing rate with its size. Sufficiently large economies of size can offset these advantages of smaller package for the seller and can make it more profitable to offer larger than single-serve packages. A single-serve package permits the seller to discriminate among buyers with different usage requirements, each consumer self-selecting to purchase quantities that match, as closely as possible, his or her desired level of consumption.

Source: Working Paper
Exact Citation:
Kohli, Rajeev, Oded Koenigsberg, and Ricardo Montoya. "Package Sizes for the Bottom of the Pyramid." Working Paper, Columbia University, 2007.
Date: 2007