Price Discrimination: How and Why it Works

Last updated on: December 6, 2011 at 7:00 am by Tim

Price Discrimination: How and Why it Works 2011-12-06T07:00:28-05:00 Tim

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

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 priceline.com, 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!

Faith and Economics

Previous Post

December 5, 2011

Totally Money Carnival | Building Wealth Edition

Next Post

December 6, 2011 Merry Christmas from the Candidates

Browse Our Archives

Select a Category ALL Bible and Money Biblical Perspective Book Reviews Budgeting Business Corner Churches and Pastors Debt Encouraging Scriptures Entrepreneurship Faith and Economics Family and Money General Personal Finance Giving Inspirational Quotes Investing Making Money Other Personal Finance Retirement Reviews Round Up Saving Self-Improvement Taxes Uncategorized

Select a Month January 2019 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 November 2016 October 2016 May 2016 March 2016 February 2016 January 2016 January 2015 November 2014 October 2014 August 2014 April 2014 March 2014 January 2014 December 2013 November 2013 October 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010

TAKE THE

Religious Wisdom Quiz

Which city did David conquer and make his capital?

Select your answer to see how you score.

Bethel Hebron Gibeon Jerusalem