Business use price targeting to maximize economic efficiency

Tags: economics

Price targeting is a way to get consumers to spend as much as they are willing to spend [1].

In a perfect world, a business would be able to ask, "How much are you willing to spend on my product?" Both the consumer and producer are happy: the consumer spends just as much as they're willing to and the producer makes as much as they can. This is the most efficient economic solution.

Of course that will not work in reality so business use other techniques to get less price-sensitive customers to pay more. For example, by charging more money for fair trade coffee or offering more "luxe" offerings, such as at Starbucks, where you can buy a simple drip black coffee or a venti double-foam caramel macchiatto.

Airlines do this by charging higher prices to business customers than vacationers. Groceries do this by tracking purchases and coupon use (hence the reason for loyalty/rewards programs).

Another name for this practice is "price discrimination".

Ideally business would be able to target price on an individual basis, but this requires a large amount of precise information which can be costly and difficult (if not impossible) to obtain, so most of the time businesses use broader, less accurate targeting practices (e.g. group targeting such as student and senior discounts).

References

  1. Harford, Tim. The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car! Oxford ; New York: Oxford University Press, 2006.