Price Discrimination: How and Why it Works

Price Discrimination: How and Why it Works December 6, 2011

Price discrimination is a pricing strategy that charges customers different prices for the same goods or service.  It’s simply a way for businesses to maximize profits.  We see it around us all the time.  The price of a good or service might be different in another part of the country, or discounts might be provided for customers of a certain age.  This is price discrimination at its finest and it’s important to understand both as a consumer and as a provider of goods and services.

Price Discrimination Examples

It’s no surprise that different people have different abilities to pay for goods.  Let’s say two people need to fly across the country.  One person is a business executive and the other person is a college student.

The standard airline ticket costs $400.  The business executive thinks it’s a great deal so he buys the ticket right away.  The student, however, has a tighter budget and is a lot slower to buy the ticket right away.  What can he do?  He can jump on, or search for other special airline deals.  If he is able to buy the same exact ticket for $300 because of online discounts, he took advantage of price discrimination.

Price Discrimination Can Be a Win Win

For the student, he was happy to buy the ticket at $300 because $400 was just too expensive.  For the business executive, the price of the ticket wasn’t an issue at all, so he’s just happy to fly to his destination.  For the airline, they’re happy because they don’t have to fly the plane with an empty seat.  It’s much better to fill it with a ticket sold for $300 than to leave it empty.   Price discrimination made it possible for all three parties to have a ‘win.’

Another way to view price discrimination is to think about coupons.  It’s hard to differentiate between buyers who can afford to pay full price and those who can’t afford to pay full price, but coupons help make this easier for companies.

Companies that issue coupons are practicing a form of price discrimination in hopes to attract people who might otherwise not purchase their product.  The discount from the coupon makes it so that the product is within their budget.  Just like the airlines, the manufacturer providing the coupon is glad to sell the product at a discount and hopes to gain that customer for life.

Price Discrimination and Customer Segmentation

One of the most common forms of price discrimination is through customer segmentation.  This is a more general way for businesses to charge the maximum price while not missing out on sales by those who can’t afford the regular price.

Think about a movie theater – an excellent example of price discrimination in action.  There’s usually a standard admission, student ticket, and senior discount.  How about matinee rates and discounts for children under 10?  They’re all attempts to bring in customers who might not have come if the price was fixed at the standard rate.

Using Price Discrimination in Your Business

If you have a business and you’re charging one rate for a product, you might be missing out on business.  By adopting creative discounts like ‘student rates’ or ‘senior discounts’ you can attract an entirely new crowd and increase business.

But my profits aren’t the same if I lower the price?  True, your profits might be lower or nonexistent for some customers, but if you can get them through the door, you might make up the profits by selling another item.

Why does McDonald’s give free coffee to seniors?  Yes, it’s a nice thing to do buy they also might draw in new customers that they otherwise wouldn’t have seen.

Have you experienced price discrimination lately?  Did it work in your favor?  Share it with us in the comments!

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