A useful thing to keep in mind about being in business is that you’re attempting to be the anti-economist. Everything that the standard textbooks say about how competitive markets work to maximise human well being and utility – you’re trying to subvert all of that. That’s how you might make economic profit, the aim of your being in business in the first place.
One great way of doing this is market segmentation. Sure, there’s a “market price” out there. Charge more than this and you start to lose custom. Less and you make losses. Perhaps a tad more complex than this but good enough for now. The best end result you can get will be by charging that market price.
However, look at this from the other side. Some people will happily pay more than that price. They have different valuations of what is worth it to them. What they would pay but don’t have to is known as the consumer surplus. A conventional estimation of the value of this surplus is about the same as the entire economy again, 100% of GDP. Plenty there to fatten profit margins if only if could be captured.
A method of doing this is to reject the idea that there is the one market price. Assume that there are different market prices. Different groups of people are willing to pay different amounts, Actually, each individual is willing to pay a different amount but really precise targeting like that is difficult. The problem is well, how do we manage to charge the different groups the different amounts they’re willing to pay?
That’s market segmentation. Make roughly the same car with minor changes to badge and aura and sell it at different prices to those who will pay them. We might call this the VW system, with Seat, VW, Skoda, Bentley, Audi etc being the different badges and auras.
Or, we might find something that we’d probably – probably – give people anyway and yet find a method of charging some people to definitely have it. Like, say, joint seating on an airline:
UK airline passengers are wasting up to £175m a year on unnecessary allocated seating fees, new research suggests.
That’s £175 million feeding straight through to the airline profits. Everyone’s already going to be on the plane, have a seat, but being able to charge for which ones is pretty good.
Almost half (45%) of people who pay to sit with their companions would be seated together anyway, according to an investigation by the Civil Aviation Authority (CAA).
Well, no, it’s not a waste of money, Some people will value the certainty. And the airline gets to capture some of that value of that certainty – and why the heck shouldn’t they?
The aviation regulator urged airlines to tell customers how likely it is they will be split up unless they pay extra.
But that’s to slightly destroy the point. From the business end we’re trying to get money from those who value the certainty while still offering the lowest possible prices to those who don’t. Reducing the uncertainty doesn’t aid us in doing that, does it?
We’ve market segmented, increased revenue and reduced the consumer surplus. We’ve subverted that perfect free market model, our aim in business. Sure, economists might not be happy about it but we are.