I once ate at a restaurant — I’ll call it Dutch’s — that didn’t have a senior citizens section on its menu. Instead, it had a “seasoned citizens” section. The selections were smaller portions of dishes listed in other parts of the menu, but these selections were at lower prices. Furthermore, anyone, regardless of age, could order from this part of the menu.
Genius! Why? Because Dutch’s pricing scheme side-stepped three pitfalls of giving a price discount to someone because they are a member of a particular group.
Pitfall #1: Not every member of a group is equally price sensitive. So a price discount given to every member of a favored group hurts your revenues and profits. Take senior citizens for example. Yes, many seniors are on fixed incomes and have limited financial resources. But many others are prosperous, and you can get their business without a price discount.
Dutch’s restaurant made its customers prove they were price sensitive by accepting a smaller portion in return for a lower price. If you didn’t want a smaller portion, then you had to pay full price.
Pitfall #2: There are multiple ways to offend your customers with such a pricing scheme. For example, suppose you assume someone is a senior citizen and automatically give them your senior discount. People who haven’t reached that age yet might be offended you think they look “old.” (This happened to me once. In my case, I wasn’t too proud to take the unasked-for discount. If they wanted to throw some of their profit away, I was happy to take it.)
You’re on pretty safe grounds offering a price discount to senior citizens—at least for now. But other categories of people are more problematic. In 2018, a restaurant owner, trying to drum up more business on Sundays, offered a 10% discount to anyone who brought in a church bulletin. His pricing scheme attracted nationwide criticism and negative publicity.
Dutch’s restaurant side-stepped this pitfall by making its reduced prices available to everyone, not just members of a particular group. Everyone who ordered the same thing, paid the same price.
Pitfall #3: Offering the same product at a reduced price also reduces your profit margin. For example, selling a $15 dish that has $5 of ingredient costs leaves $10 to pay for overhead and provide a profit. Selling that same dish for $12, leaves only $7.
Dutch’s restaurant safeguarded its profit margins by selling versions of its regular dishes that cost less to make. The lower costs helped offset the lower selling prices.
My example has centered around a restaurant, but the lesson applies to any business that is using a group pricing scheme. Are you encountering any of these problems? If so, consider offering reduced-priced, lower-cost versions of your products instead.