Of all the readers, majority, I’m assuming considering the title, are price sensitive. But this is not only for the people who are price sensitive, it also discusses how firms find customers who are cavalier about price.
Three common strategies.
First, it’s what economists call ‘first degree price discrimination’ or simply ‘unique target’ strategy- to evaluate each customer as an individual and charge according to how much he or she is willing to pay. For instance, supermarkets accumulate evidence of what you’re willing to pay and offer you ‘discount cards’, needed to take advantage of sale prices. We’ve all seen the ‘accept cookies’ option on mainly every website we visit. It’s basically a tracing device that records your shopping history and the links you visit on a website. Two customers buying the exact same thing would be ordered different prices based on what they had previously bought. However, this is unpopular as customers realised that deletion of cookies lowered the prices of the products, leading to an outcry.
The second method, called the ‘group target’ strategy, does not raise much objection, which is to offer different prices to members of different groups. Who would complain about the reduced bus fares for children and the elderly? People think it’s reasonable for coffee shops to offer a discount to people who work nearby and for tourist attractions to let locals in for a lower rate. Why? It’s because people in groups who pay more are usually people who can afford to pay more, and that’s because people who can afford to pay more are usually people who care less about price. Companies trying to maximise their profits are interested in who is willing to pay more, rather than who can afford to pay more. For example, when Disney world offers admission discounts of over 50 per cent to locals, they are not making a statement of grinding poverty of the sunshine state. They simply know that for a reduced price, locals are likely to visit regularly. But tourists will probably come once, and one only, whether it is cheap or expensive.
Either of these 2 methods will deliver more profits than simply treating all customers as a homogeneous mass.
The cleverest and the most common way to persuade turkeys to vote for Christmas is the ‘self-incrimination’ strategy - to get customers to give themselves away. We’ve all been to coffee shops, and we’ve all seen the vast difference in prices two different types of coffee. They sell products that are at least slightly different from each other and so you never really know whether the firm is using a price targeting trick or merely passing on added costs. But we all know it’s safe to say that companies are always alert for ways to squeeze out the maximum advantage out of whatever scarcity power they have, and price targeting is the most common way to do so.
So if it looks like price targeting, it probably is.
Supermarkets have turned price targeting into an art—developing a vast array of strategies to that end. It’s not that some supermarkets are expensive and some customers stupid. It’s because they offer additional, expensive choices, which the shoppers are willing to take because they believe the quality premium is worth is.
Supermarkets are so full of close substitutes, some cheap, some expensive, and with a strong random element to the pricing. The random element is there so that only shoppers who are careful to notice, remember and compare prices will get the best bargains. If you want to outwit the supermarkets, simple observation is your best weapon. And if you can’t be bothered to do that, you don’t really need to save money.
~Shagun Khetan
Operations Head, Ecofinlysis
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