TapRun Consulting

The Wrong Kind of Price Discrimination

by Adam Juda on Monday, October 1, 2018

One of the beta readers for my book, Premium, raised concerns over a section that dealt with price discrimination. Unfortunately, the topic is often viewed with distaste and cynicism because of its unfortunate name - a name that evokes thoughts of racism, sexism, and general bigotry.

In truth, price discrimination has nothing to do with any of the above. It isn't used to prevent specific shoppers from purchasing a given product. Instead, it's a tool that is most typically used for maximizing vendor profits.

Here's a brief summary of how price discrimination works:

  1. A firm separates its pool of potential customers into groups that share something in common.
  2. Next, the firm analyzes each group to understand its biggest pain points.
  3. Finally, the firm creates products, each tailored to a unique group and offered at a unique price.

Getting each step right can prove challenging, but the payoff when everything goes right can be immense. Price discrimination allows firms to sell their wares at a variety of price points, each well-suited to a specific group of buyers who would be unwilling, or unable, to spend more for an alternative. As a result, businesses earn greater profits, and customers enjoy improved access to goods that fit their needs and budgets.

At least, that's how I understood the topic for years. It was only recently, while walking back from my metered pricing adventure, that I realized that maybe the line between price discrimination and what people normally think of as discrimination could be far more blurred than I had first imagined.

Behold, a rather intriguing pricing structure advertised by a local theater:

Price discrimination in action
Your age is your price - if you're under forty.

This system breaks with the traditional mold of price discrimination. Most examples revolve around firms that offer a variety of choices and allow consumers to select their preferred options. This model is exactly the opposite. Only one good is made available, but its price varies from buyer to buyer.

I understand why the venue selected the pricing model that it did. Theaters have a problem - there's a demographic shift going on, and younger generations don't seem to be interested in going to the theater anymore. This cultural shift represents a problem for said venues. Not only do they need money to cover their costs at present, but they also require a degree of certainty that the youths of today will become their primary customer base in the future.

Price reductions might appear to be the most effective way to attract customers who do not place a high value on one's offerings - especially when the consumer being targeted is young. Many people in their 20s and 30s are not only earning less than those who are older, but they're increasingly saddled with significant levels of debt.

At best, price reductions led to the acquisition of a disinterested customer base that provides little in the way of loyalty or long-term profitability. This type of customer simply goes with whatever competitor offers the lowest price. Under the theater's promoted pricing methodology, the venue is attempting to attract price-sensitive buyers with a scheme that makes it clear that customers will have to spend more money for similar offerings in subsequent years. Unless the theater's shows include an addictive component, I suspect that this is far from an optimal approach.

Besides, I'm not entirely convinced that money is what's stopping younger residents from attending the theater in the first place. Based upon this map showing the cost of an average date, I'd be willing to bet that younger people are willing to spend money - but only for the types of experiences that most interest them.

The theater would have been better off using a more traditional form of price discrimination. Not only would such an approach have led to increased revenue, but it could have ensured a tighter product-market fit with younger demographics. I'm far from an expert in the dramatic arts, but I suspect that any one of the options below would have proven far more effective, providing increased profits and a more devoted set of customers:

The more I thought about it, the more unusual the theater's pricing scheme appeared. Pricing based upon age (for adults) is far from common in this country. Many firms, such as restaurants and airlines, do provide discounted bundled offerings for children accompanied by an adult. Others provide discounts to people over the age of sixty-five. However, it's fairly unusual to come across pricing discounts that are only made available to younger adults.

Why is this? I have a few ideas, but one of the most obvious has little to do with psychology or economics.

Before I spill the beans, I'd like to offer the following disclaimers:

It is my belief that some would consider this type of price discrimination to be a bit too much like actual discrimination.

While some might see the theater's pricing scheme as one that allows younger people to pay less, others might interpret it as one that requires older people to pay more. Like many other countries, America does not look favorably upon anyone who takes advantage of older people. Even medical insurance, a product that is vastly more expensive for older buyers, requires younger people to heavily subsidize the rates of older customers. In many states, Florida appearing to be a notable exception, venues might even face legal challenges by charging more money to older patrons.

When it comes down to the crux of the matter, however, the question we should be asking isn't whether firms should be allowed to price in such a manner. Instead, we should ask why firms would even consider doing so when superior methods are available.

I'll give the venue a bit of lukewarm praise for creativity with respect to its pricing gimmick, but, at its heart, it is just that - a gimmick. I can't help but believe that a renewed focus on value, rather than price, would have proven far more profitable, strategically valuable, and far less controversial to the public.