Capturing More of Your Market by Eliminating Dead Weight Loss

Capturing More of Your Market by Eliminating Dead Weight Loss
By Robert W. Bradford

What is dead weight loss? It's what happens when a customer wants something - and is willing to pay a given price for it - but settles for something that is either above or below his or her ideal price. In many markets, the price difference will correspond with real differences in value delivered to the customer.

A good example of this happens with airline tickets. There are times when a given route, because of intense competition, is priced very low. Let's say you would be willing to pay $200 for a ticket from New York to Miami, especially if you felt you would be getting good service. Because of competition on that route, you might find prices as low as $100. Now, in the long run, $100 is probably not a viable price for that route - because the average cost of flying the plane exceeds $100. But you buy the ticket anyway, since you want to go to Miami. The airline has suffered a dead weight loss of $100 when you buy the ticket for $100 less than you were willing to spend.

Dead weight loss also occurs when you decide NOT to buy the ticket if the fare rises to $250. In that case, the dead weight loss is $200, because you did not spend any money with the airline. Airlines tend to use a process called yield management to fill as many seats as possible at a given price level with minimum dead weight loss, but it tends to be a losing battle. The main reason is that the main fare variations tend to happen in very predictable ways, and passengers understand those systems pretty well. But the basic concept does have some merits, because it enables airlines to offer multiple prices for the exact same seat, which reduces the dead weight loss. How can you do this in your business?

First, it's safe to assume that your current pricing doesn't represent the ideal price to most of your customers. In some cases, you lose customers because your price is too high, and in other cases (far more common), you are leaving money on the table because your price is too low. If customers were honest with us about the prices they are willing to pay, we could, theoretically, ask each customer and set the price for that customer. Unfortunately, this doesn't work in most real world cases, and in some cases it involves an illegal practice known as price discrimination. However, you can always offer customers a little more or a little less when you sell them anything. For example, when customers buy electronics at many chain stores, they are offered a service plan. Without going into the merits of the service plan or its real value, this is a good example of upselling customers who are willing to pay a little more for a better consumer experience.

Examples of upselling are all around us. From a simple "Would you like fries with that?" to the more lucrative "You can add the service and maintenance plan for $50," large retail chains are masters at selling you low-priced product, and then tacking on a bit of very high margin upsell. The beauty of this approach for those retailers is that they are able to capture some of the best of both worlds -- the huge volumes coming from commodity customers, and the higher margins from the specialty customers.

Be aware that this is a tricky game to play. K-Mart learned in the 1980's that you can only move customers so far up the curve. Wal-Mart is probably learning the same lesson right now as they seek to push into fine jewelry and high-end luxury goods in their stores. The problem with this approach is that, although you are offering the specialty customer a more specialty product or service, they still have exactly the same buying experience as the commodity customer -- and it's often a pretty poor experience at that. Another way to think of this is to realize that airlines can do a lot to attract higher margin customers, like business travelers -- but at the end of the day, we all get on the same airplane.

Even with that caveat, it's always worthwhile to test the upside of your pricing structure by offering valuable goodies to people who are willing to spend a little more. When looking at strategic opportunities this year, spend some time thinking about how you might do this -- and make more money from it. You'll likely be glad you did.

Robert Bradford is President of Center for Simplified Strategic Planning, Inc.
He can be reached by email at

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