How Businesses Make Money with Price Discrimination

Price discrimination is a common tactic used by businesses to increase their profits to levels previously not attainable. Price discrimination occurs when a business is willing to sell one product or service to a certain group of people for a certain price, and the same product or service to another group of people for a different price. Assuming that the businesses cost's of the product or service is relatively cheap (as is the case with many products), businesses will still make a profit if they sell something twenty five percent off.

Price discrimination happens all of the time, and it generally comes disguised as good will. Many businesses cater specifically to students by offering a student discount. Some students would not have purchased the product if they had to pay 100% of the price, whereas if the product or service becomes available at 90% of the retail price, then the student instantly becomes a daily consumer of the product or service. Another great example is a military discount. Businesses play the good will card by saying to the public how much they care about their servicemen, when in reality, they are more concerned about their gross profits. You see, just as in the example of the student, some military members may not be willing to purchase the product or service for 100% of the retail price, but they would be more than happy to become a consumer of the product or service for a mere 75% of the retail price.

Another very common example of this is the senior discount or matinee showings that movie theaters tend to offer. By offering discounts to a group of people that have free time in the day, and elderly citizens movie theaters are able to significantly increase the volume of sales that they have. Everyone that would not have went to the movie theater for ten dollars a ticket would be more than willing to go to the theater for seven dollars a ticket, thats a thirty percent discount! This may seem like businesses would be losing money, but they aren't. This is due to the fact that most products out there cost companies only a very small fraction of their retail price to make, the rest of the price is referred to as a profit margin. These extremely high profit margins allow businesses to make more money by offering discounted prices.

The key to proper price discrimination is being able to identify members of specific group, which is why businesses will often create discounts for groups that will all have an identification card. You will never see a "smart" business offering a discount to any sort of group that is not easily identifiable, and this is because if you could not differentiate between groups, then everyone would end up getting the discount price!