Managing Service Demand: Shifting and Bundling

Demand shifting is a popular strategy among service providers for managing demand. The strategy tries to shift demand from peak time periods, where capacity constraints are binding, to offpeak time periods when we have excess capacity. Examples include cities shifting rush hour traffic by having employers staggering work hours; electrical utilities giving their customers timers to shift the starting time for electrical appliances such as dishwashers; water authorities restricting watering times; and the postal system's "Mail Early for Christmas” campaign. This paper shows that, although not-for-profit services may find demand shifting strategies are effective, these strategies usually offer no improvement in profits. These strategies are, therefore, ineffective for private service providers who seek to improve profits. It is better for these private service providers to eliminate excess demand during peak periods, for example with higher peak prices, than to attempt to shift some of this demand to the off-peak period. For-profit service providers should, instead, focus on demand stimulating strategies. We show, for example, that bundling strategies, that manage demand by combining peak with off-peak service delivery, can be very profitable. Local telephone companies, for example, only sell combined peak and off-peak service. Surprisingly, however, we find that service providers should focus on stimulating demand during the peak period, rather than the off-peak period. We find that increases in demand during the peak-period have a greater impact on profits than increases in demand during the off-peak period because, when operating at maximum capacity, we have the greatest sales. Small increases in peak-demand cause large peak-price increases, because we are at peak capacity, and these price increases are paid by many customers, many more than during the offpeak period. Hence, while non-profit services should shift customers to the off-peak, for-profit services should shift customers to the peak.