Living Economics

Flat-rate Pricing
Flat-rate pricing may increase the bottom line of businesses when consumers over-estimate the amount they might consume and under-estimate the cost of un-restrained use.

A three-year study of about 8,000 gym-membership records from the Boston area found about 80% of gym members with a monthly contract were paying significantly more than if they had gone on a per-use basis.

In the 60’s, Greyhound Bus used to sell a bus-ticket that was good for 99-day unlimited travel for $99 when most round-trip rides cost much less than $99.

In both cases, flat-rate pricing can be profitable when it costs buyers to use as much service as they think they want. Specifically, going to the gym takes time and effort and is more like taking cod-liver oil. It is good for you but not exactly a joy ride. Similarly, few people have enough free time to travel for 99 days although the thought of unlimited travel is very seductive.

Flat-rate pricing is particularly profitable to sellers when its subscription is automatically renewed until canceled. Not only would usage naturally fall short of goal, cancellation also lags behind non-use due to procrastination.

Although flat-rate pricing might benefit those who are using more service than is anticipated by the seller, it might also attract buyers who have been confused by the multi-tiered pricing scheme.

The profitability of all-you-can-eat restaurant boasting of endless variety is always a matter of debate. People tend to eat more when confronted with variety (Nutrition Action Healthletter) and usually expensive items. Red Lobster's Endless Crab promotion in 2003 was so popular that the president of Red Lobster was fired for vastly underestimating how many Alaskan crab legs customers would consume (St. Petersburg Times on line). But there is scale economy in a fixed menu both in the bulk purchasing and preparation of ingredients. There are also high mark-up for side orders not included in the fixed menu. And flat-rate pricing might attract enough customers who have smaller stomachs than their wish to offset the big eaters.

References:
  • Business Week. 2/10/1997. “Are flat rates good business?”
  • Nutrition Action Healthletter. March 2004. “Why we eat more than we think.”
  • St. Petersburg Times. “All-you-can-eat was too much.”[Updated 9/26/2003; cited 4/8/2006].
  • WSJ. 7/16/2003. “Why you waste so much money.”
Access Tools
• Advanced Search
• Browse Micro
Comparative advantage (14) Competitive strategy (27) Costs and opportunities (53) Entrepreneurship (3) Externality (28) Free Market Solutions (17) Free Ridership (3) Game Theory (22) Incentives (13) Income Distribution (25) Information (19) Labor Market (24) Marginal optimization (33) Market Demand (17) Market Entry (9) Market Exit (2) Market Intervention (12) Market Structure (29) Market supply (4) Material Flow (2) Miscellaneous (3) Price Discrimination (17) Pricing Strategy (46) Profit maximization (48) Property Rights (42) Regulation (16) Rent Seeking (2) Risk Taking (12) Scarcity (10) Tastes & Preferences (27) Taxes (7) Technology (9) Type of goods (31) What Price Means (27)
• Browse Macro
Boom and Bust (9) Budget Balance (12) Comparative advantage (13) Economic Development (1) Economic Indicators (6) Fiscal Policy (12) Incentives (1) Income and output (25) Income Distribution (5) Labor Market (6) Money and Credit (20) Regulation (5) Rent Seeking (1) Saving (6) Taxes (4) Technology (1) Trade and Foreign Exchange (30)
• Glossary
List All
Search

• Microeconomics Lectures • Macroeconomics Lectures
Instructor
• Instructor Log in • Sample TOC • Demo/Register • Video Tour
Student
• Student Log in
Close
Instructor Log in

Class
Close
Student Log in


Open Menu
Term
Definition