Are the discount coupons offered by stores simply a benefit for customers? We explore the hidden intent behind price discrimination strategies and how they leverage consumer characteristics and behavior.

The Dilemma of Pricing Strategy and the Secret of Coupons

Elements of price discrimination are hidden within product pricing. The target they discriminate against is ‘people with money’!

I worked as a chef for 10 years and rose to the position of head chef. Not long ago, I opened a restaurant bearing my name. I launched a small eatery offering both dine-in service and delivery through food apps. Following the principle of selling at low prices to attract volume, I set prices very low, almost at cost. I believed attracting customers was the priority.
But business didn’t go as planned. My cooking is far superior in both taste and quality compared to nearby restaurants. Reviews on the delivery app are also quite good. Yet, my prices are 20% lower. So why are there so few customers? It seems my strategy of offering delicious food at a low price isn’t working well. Repeat visits and repurchase rates are also too low.
Then one day, the manager of the delivery app came to inspect our store and advised us to try raising our prices slightly and then discounting them to the current price using coupons. It was a bit of a hassle, but I decided to give it a shot anyway. And sure enough, our delivery sales really shot up.
But I have one question. Why raise prices and then use coupons? Customers actually have to download the app to use coupons, which is a hassle, right? It seems like you could just lower the product price directly. Some customers don’t even know coupons exist. How should I let these customers know?

Discount coupons are a form of price discrimination

Menu pricing is a crucial aspect of running a restaurant. If prices are too high, customers hesitate to come in, and low foot traffic creates a vicious cycle where even fewer customers visit. Conversely, if prices are too low, the daily production capacity is limited. Even if many customers come, you can only accommodate some, potentially sacrificing more profit.
Finding the right price balance helps maintain a steady customer flow. When customers enjoy delicious food at a satisfying price, they’re more likely to return. Therefore, identifying that optimal price equilibrium is key. So, from a business perspective, how should menu prices be set?
Have you ever visited fast-food chains like KFC or McDonald’s and used various coupons to get discounts on your purchase? Nowadays, various business applications issue and utilize electronic coupons. Why do sellers use discount coupons? Wouldn’t simply lowering the product price attract more customers? Why go through this extra hassle?
Truthfully, both sellers and customers find this process somewhat bothersome. However, there’s a clear reason why the discount coupon system has remained popular for so long.

You’re selling ice cream and currently have two left in stock. The cost is only $0.20 per unit. Two people come to buy ice cream. Customer A offers to pay $0.70, and Customer B offers to pay $0.50. What price would you set?

If you set it at $0.70, you can only sell one and earn $0.50. You won’t sell the other one. Pricing it at $0.50 allows you to sell both and earn $0.60. So, is $0.50 the right price? But there’s a downside. Customer A was originally willing to pay up to $0.70, but you’re selling it for $0.50. Of course, from the customer’s perspective, this is naturally appreciated. Saving $0.20 feels like getting free money.
From an economic perspective, this $0.20 is ‘consumer surplus’. Naturally, the greater the consumer surplus, the greater the customer’s satisfaction. But the seller feels a twinge of regret. The customer was willing to pay more, yet by setting the price lower, that money went into the customer’s pocket instead of the seller’s.
So how can we ensure the customer who was willing to pay $0.70 pays exactly $0.70, and the customer who was willing to pay $0.50 pays exactly $0.50?
Set the price at $0.70 and apply a $0.20 discount coupon. However, attach slightly complex conditions to how the discount coupon is applied. So what happens?
Customer A, who was already prepared to pay the $0.70 purchase price, accepts that price and buys the item. Customer B, while seeing the $0.70 price, can apply the discount coupon to get the exact discount they want. The feeling of actually saving money by getting the discount outweighs the slight complexity, so they happily download the coupon, pay, and take the item.
Each consumer has different price elasticity of demand. In other words, their sensitivity to price varies. Some people would never buy the item without a coupon, while others don’t care much about discount coupons. Therefore, if the seller lowers the price directly without offering a coupon, they effectively lose some revenue.
In economics, this strategy is called ‘price discrimination’. However, the discrimination here is not meant in a negative sense, nor is it positive. The target of discrimination is not the person using the coupon, but rather the affluent person who does not use it. According to the economic definition, price discrimination actually creates a kind of price difference. Selling the same product at different prices depending on the buyer leads to the formation of different selling prices or consumption standards among those who accept it.
Price discrimination occurs because managers sell the same goods or services at different prices to different buyers without a legitimate reason. Price discrimination is a type of pricing strategy chosen by monopolistic firms to maximize profits.

First-degree price discrimination: Bargaining

Throughout business history, price discrimination has formed a rich body of theory through numerous cases. Economists classify it into three types based on the degree of discrimination.
The first is first-degree price discrimination, also called ‘perfect discrimination,’ where the price per unit of a good is different for every buyer. The prerequisite for first-degree price discrimination is that the seller knows the exact amount each consumer is willing to pay for the product. Based on this, the seller sets the price, and the determined price matches the consumer’s demand price for the product. Thus, the seller captures all consumer surplus from every buyer.
In first-degree price discrimination, the seller assigns a different price to every unit of the product purchased by the customer. Under what circumstances does this phenomenon occur?
A common example is street vendors. They initially quote a very high price and, through bargaining, discern the consumer’s ‘psychological price’—the price they have in mind. They then sell the product at the highest psychological price the consumer is willing to pay. This type of consumption typically applies to ‘informal goods’. This is because there is no standardized official market price, so psychological pricing is set based on individual judgment.

I wanted to buy a souvenir to remember my trip at a resort on a beautiful beach. Small shops lined the beach, and various souvenirs were displayed on the stalls. They were all locally made handicrafts, items rarely seen in other cities.
After browsing around, I found a souvenir I liked and asked the price. The shop owner glanced at me and said, “I’ll go up to $60.” Thinking it was expensive, I started bargaining. The price dropped to $40, and I happily opened my wallet.
Not long after, a woman came in looking to buy the exact same souvenir. The shop owner gave her a once-over. She was decked out in a designer bag, a designer bracelet, and a designer dress. “It’s handmade. I only have this one. It takes days to make just this one. You’ll have to pay $40.” She paid the $40 immediately and left happily.

What was the actual cost of that souvenir? It doesn’t matter. This is precisely first-degree price discrimination, meaning ‘Cut your coat according to your cloth’.

Second-degree price discrimination: Setting different prices based on purchase quantity

Even for the same product, the quantity each consumer needs varies. For instance, someone living alone only needs one set of tableware. Or, they might want two or three extra sets in case guests come over. But suppose the seller offers a 50% discount if they buy a 100-piece set. In that case, they’ll just buy the standard 2-person set at full price because they don’t need a large quantity.
But if they’re opening a restaurant, they might need a set of 100. This is the consumer’s ‘price elasticity of demand’. It means setting different prices per unit based on the consumer’s demand.
This is precisely the situation that gave rise to ‘Second-Degree Price Discrimination’. The seller identifies the consumer’s demand curve and then sets different prices based on the quantity purchased. This allows them to increase sales volume while capturing the ‘consumer surplus’ generated when purchases are made in different quantities.
In the case of second-degree price discrimination, while it’s difficult for the seller to perfectly understand each customer’s characteristics, they do understand the diversity of customer preferences. Therefore, they present a range of options that include various prices and ancillary conditions.
From the buyer’s perspective, they can decide and choose for themselves. They simply select the option presented by the seller that best fits their own consumer demand curve. This process ultimately leads to a mutually agreed-upon outcome between seller and customer, maximizing both purchase volume and price. Let’s look at an example.

You’ve traveled far for a relaxing break. Besides the souvenir you just bought, you want to pick up a few more gifts for colleagues. So this time, you stop at a shop selling refrigerator magnets. The shop owner offers them at $3 each, but you bargain it down to $2.
“If I buy 10, can you give me a bigger discount?”
The shop owner then offered to knock off another $5, selling them for $15 total. Now, each magnet cost $1.50. As you paid and packed the items, the shop owner said,
“If you buy 10 more, I’ll only charge you $10.”
You started to think. Buying more meant more savings. Just now, buying 10 meant a unit price of $1.50, but buying 10 more would lower it to $1.00. Feeling good at the thought of being able to buy more gifts for your colleagues at this price, you bought 10 more, purchasing a total of 20.

Setting prices based on purchase quantity means buying more is more profitable. That’s why many stores run promotions like ‘20% off two items, 50% off three items’. This event stems directly from second-degree price discrimination.
Meanwhile, economics also introduces the concept of ‘reverse second-degree price discrimination’. ‘Forward’ refers to the phenomenon we just saw, where prices get cheaper the more you buy. ‘Reverse’ is exactly what it sounds like: the price increases the more you buy.
Mobile data is a prime example. Those who used smartphones when they first launched will know. Most likely, everyone used a ‘data plan’ product. But everyone probably experienced getting hit with a huge bill at least once after exceeding the data allowance provided by the plan. As a college student at the time, I didn’t have much money for living expenses. So, I was always anxious about my data usage. Once I used up all the data included in my plan each month, I had no choice but to wait until the 1st of the next month. But among my dorm roommates, there was one friend whose family was wealthy. I remember feeling nothing but envy watching that friend use data without a care. The essence of this ‘reverse’ second-degree price discrimination is to extract maximum profit from consumers with high purchasing power.
Overall, it’s about classifying and managing customers. This is because significant ‘consumer surplus’ can be generated from high-purchasing-power consumers. Therefore, product kits or sales models specifically targeting them are created to capture the money of ‘wealthy individuals’. Thus, the targets of price discrimination are affluent people.

Third-degree price discrimination: Differentiated by target

Third-degree price discrimination is also called ‘Selection by indicators’. This involves segmenting the market based on consumer characteristics and setting different prices in each segment. This maximizes profits in the highest-priced segment. Simultaneously, it uses price signals to ‘regulate’ resources, achieving profit maximization in each market segment. This pricing strategy is primarily used when allocating public resources.
The progressive electricity tariff is a prime example. Typically, electricity usage peaks during the day. In the evening, especially after nightfall, electricity usage plummets. Consequently, daytime often sees electricity shortages and even blackouts. Yet, as evening arrives, demand drops sharply again, forcing power plants to temporarily halt some generating units.
The progressive electricity pricing system addresses precisely this issue. By applying price differentials during peak usage hours, it ensures electricity supply to those who need it most while maximizing profits. It also ‘shifts’ demand from those who don’t necessarily need electricity to the evening, achieving equitable resource utilization.
This act of ‘shifting’ demand from peak usage periods to off-peak periods not only maximizes profits but also ensures full utilization of facility resources, holding positive significance for both sellers and society.
In the case of third-degree price discrimination, if a company accurately identifies buyer characteristics, it sets different prices based on customer information, particularly their willingness to pay and price sensitivity. Examples include country-specific product pricing, member discounts, campus-specific software pricing, and student discounts.
Third-degree price discrimination is the most common form. Sellers group buyers into segments, resulting in different prices for each specific group. This practice is called ‘Market segmentation’. Let’s look at an example.

Time passed, and I revisited the beachside resort I had found before. I stopped by that souvenir shop again. The owner was the same as before, and the store was unchanged. However, the product selection had become much more diverse. There were over thirty types of refrigerator magnets alone.
Curious, you asked the owner what had changed about these products compared to before. The owner replied that everything was different, starting with the materials and including the crafting methods.
Finally, when you asked, “So, how much are they, boss?”, the owner quoted a price that was significantly higher than before.

Why is that? Because even for the same product, its meaning differs depending on the consumer. Some buy it simply to keep as a memento, while others purchase it for its intricate quality and unique feel. The reason there are so many types of magnets is to satisfy the specific desires of each consumer.

The key is to understand the buyer’s characteristics well

To effectively utilize price discrimination, sellers must effectively segment buyers’ characteristics. These differences arise because each buyer has different desires, different purchase quantities, and different desired prices. The key is for the seller to effectively distinguish these differences.
Airlines frequently offer steep ticket discounts. However, no matter how intense the ‘discount festival’ becomes, business and government-related consumers remain unaffected. They are less price-sensitive and must travel for planned business trips regardless of cost.
Yet, sellers cannot know if a customer is a ‘business traveler’ or a ‘leisure traveler’. So how do airlines segment these passengers and markets?
As you know, discount tickets always come with conditions. These include ‘tickets must be issued within 2 weeks’, ‘round-trip tickets are only valid on weekends’, or ‘must stay at the destination for 1 or 2 weeks’. However, business trips ordered by superiors often involve relatively urgent matters. Few people plan and buy tickets two weeks in advance. Consequently, business travelers rarely qualify for ticket discounts.
The most absurd condition is the requirement to spend the weekend at the destination. In reality, when traveling for company business, one likely stays at a decent hotel with expenses covered. Spending the weekend means at least two extra nights at the hotel, increasing both lodging and travel expense costs. Moreover, spending the weekend means fewer days back at work. The support received for this will far exceed any ticket discount. So, savvy business travelers don’t get hung up on those ‘pennies’ off. That’s why business trips usually don’t extend into the weekend, and trips lasting over two weeks are extremely rare.
While the discount conditions apply equally, they hold no appeal for those traveling on business. Setting discount conditions allows airlines to tap into latent demand and identify customer segments that don’t require such discounts. Thus, airlines achieve smooth success through price discrimination. This is precisely why a certain airline’s ‘Fly Freely on Weekends’ promotion was such a huge success.
In many cases, discrimination becomes a strategy to avoid risk at minimal cost. Luxury store employees instantly gauge a customer’s appearance and tailor their approach accordingly. While many people resent this customer service approach, it’s not inherently wrong. In reality, employees have limited time. When multiple customers demand service simultaneously, they must choose. Naturally, they’ll prioritize customers who appear to have greater purchasing power.

The Internet Age: Price Discrimination Becomes More Covert

With the advancement of the internet age, information among consumers is becoming increasingly transparent. So, has this phenomenon of price discrimination decreased? On the internet, the efficiency of information transmission is extremely high. Since false fake news or ‘flyers’ can circulate rapidly through personal media, the cost of discrimination increases, and overt discriminatory practices are gradually decreasing. However, in a sense, this also means discrimination is becoming more covert.
Online sellers find it difficult to adopt the traditional price discrimination method of ‘setting prices based on who they see’. If one consumer pays $0.40 per 500g for apples while another pays $0.10, traces of this immediately appear online. Once consumers discover this, comments and reviews like “This is unfair,” “The seller is unethical,” or “I’ll never buy from them again” will likely appear.
How can sellers win over consumers’ hearts and capture more ‘consumer surplus’?
In the internet age, consumers actively engage in relatively complex processes, like downloading coupons, to enjoy benefits. It’s a form of ‘user labor’. This creates a psychological balance between consumers paying full price and those receiving discounts, allowing sellers to achieve high profits—truly a ‘win-win’ scenario.
Let me introduce one common event in social commerce. Consider Consumer A who wants to buy a specific item. Finding the price a bit steep, they invite friends, family, or acquaintances to jointly purchase the product, thereby lowering the price. Consumers receive discount benefits, and sellers get ‘free advertising’ without incurring costs, benefiting both parties.
Consumer B, who also wants the same product, isn’t particularly price-sensitive. So, they paid the full price immediately. The seller thus secures a high profit margin.
Thus, social commerce offers a mutually beneficial price discrimination strategy leveraging user effort: discount benefits for price-sensitive consumers and comfortable full-price purchases for others. Like tactics requiring coupon downloads for discounts, this ultimately benefits the seller.
The rapid growth of some social commerce platforms stems from effectively employing this price discrimination strategy. When multiple people purchase together, the price drops immediately. Once a set number of buyers is reached, the price drops again. This way, even for the same product, the price varies based on the customer’s ‘level of effort,’ attracting potential buyers with purchasing intent. It can even catch consumers who initially had no intention of buying, pulling them into the same net.

Price Discrimination That Satisfies Everyone

A bakery launched a new cake priced at $39. After a period, sales began to decline. To boost revenue, the manager lowered the price to $29. This meant dropping the price of the same product by $10 in a short time. While this might attract many new customers, it also meant losing the customers who originally bought at $39, resulting in a $10 loss in profit.
That’s why experienced managers don’t just drop the price like this. Instead, they set a special price with an additional condition. For example, they might run an event where customers upload a photo of the cake to social media and, if they receive 100 likes, they can purchase the product priced at $39 for $29. This ‘user labor’ naturally differentiates the pricing strategy.
For hotels, prices vary depending on the advance booking date when reservations are made through online booking sites. However, for price-insensitive customers—especially those needing urgent hotel stays—the priority is booking quickly, convenience, cleanliness, and saving time. They’ll pay a bit more for that. Conversely, price-sensitive customers will plan trips in advance, lock in dates, and go through slightly cumbersome processes to secure discounts.
Regular promotional events work the same way. They indirectly set differential prices on products to secure higher profits.
Suppose a cafe runs a weekend event selling its Americano, normally priced at $0.40 per cup, for $0.20. Price-sensitive consumers will wait until the weekend to buy their coffee, while others will just buy whenever they feel like it.
Shopping malls run massive discount events every weekend. It’s a strategy to lure ‘salary workers’ out of their homes. Otherwise, they’d just stay cooped up at home and not spend separately. The reason neighborhood supermarkets hold weekend discount events is also to give ‘mothers’ an opportunity. Otherwise, everyone would just shop at the big supermarkets.
Why don’t young people get supermarket ads? They’re too busy every day. Even young people who enjoy shopping at supermarkets don’t pay much attention to promotional events. Of course, they know traditional markets sell vegetables much cheaper. Still, buying at regular prices in the supermarket without the hassle is more convenient. Supermarkets maximize profits through these promotional events.

Some consumers actually enjoy price discrimination

There are also cases where consumers willingly embrace ‘discrimination’. Human behavior and decision-making often deviate from rationality, and sellers exploit this irrational consumer behavior to ensure they don’t feel they’ve suffered a loss due to ‘discrimination’. They even go so far as to make consumers enjoy the ‘discrimination’.
Institutional economists, including Veblen, pointed out that “when purchasing an item, people focus not only on its use value but also on whether it can demonstrate their wealth, status, and class.” According to this argument, a product contains two values: its practical functional value and its value for demonstrating one’s existence. The latter value is a concept linked to market price determination, explaining why the more expensive a luxury item is, the stronger the desire to purchase it becomes. In economics, this phenomenon is called the ‘Veblen effect’. It refers to the phenomenon where demand does not decrease even as prices rise, due to the desire for ostentation or vanity among certain segments of society.
Sellers can achieve the best results by combining ‘price discrimination’ with the ‘Veblen effect’. Airlines divide airplane seats into classes based on economic status and provide special services accordingly. This sense of superiority is precisely what makes consumers willingly embrace ‘discrimination’.
‘Price discrimination’, which applies differently to different people, can sometimes lead to consumer dissatisfaction due to issues like ‘discomfort’ or ‘equity’. The following is an example that brilliantly eliminates this ‘discomfort’ and ‘equity’ by leveraging consumers’ irrational characteristics.
Have you heard of the online game ‘Wild Rift’? The game features various paid items called ‘skins’. Equipping them grants flashy effects, making them very popular among users. Within the game, a designated store runs a kind of ‘skin’ discount event.
During the event, every player gets one free chance to win a discount on skins through a lottery. If you win, you receive a corresponding discount when purchasing skins.
First, the skins targeted here are usually those for the character players use most in the game. This maximizes their desire to buy. Moreover, the discount event runs irregularly, and the discount rate drawn in the lottery differs for each player. This is clear ‘price discrimination’.
However, contrary to the conclusion analyzed earlier, this ‘price discrimination’ applied differently to each consumer does not provoke resentment or complaints. Instead, it fuels players’ spending enthusiasm. Why Why is that?
Above all, ‘uncertainty’ eliminates ‘unease’. The discount rate players win in the lottery is clearly not randomly selected. It’s calculated based on their consumption data. But players don’t think that way. They attribute the outcome to luck.
Next, the ‘anchor effect’ comes into play. The ‘anchor effect’ refers to the phenomenon where people’s evaluations of individuals or objects are heavily influenced by first impressions or the first information encountered. It describes a state where a person’s thoughts become ‘anchored’ in one place, much like a ship dropping anchor in the sea.
In a game’s ‘shop,’ the regular price acts as the ‘anchor,’ serving as a ‘reference point’ for customers. By making users compare the regular price with the discounted price, it weakens the comparison effect among users. The ‘anchoring effect’ provides consumers with the joy of a bargain, creating a sense that ‘buying is like making money.’
Once you grasp the principle of price discrimination, you’ll start to sense the seller’s ‘intent’ when looking at coupons offered during purchases. So, now that you understand this, do you see how you should set menu prices when running your own restaurant?