Contrary to popular belief, supermarket discount cards are not an excuse for supermarkets to collect the personal details of their shoppers. The supermarkets are happy for people to think this; most people don't mind a well-known corporation having a few of their personal details (name, address, etc.). If more people knew the reality of so-called "discount" cards, then there would be a far greater outcry.
There are two keys to understanding how discount cards work. Firstly, you must appreciate exactly how pricing works under discount card schemes. Secondly, you must learn a little economic theory (that I will try to present in layman's terms).
How pricing works under discount card schemes
Discount card schemes do not simply offer sale-style discounts on individual goods. Admittedly they will occasionally, but that is to allow the store to get rid of excess stock, or for the company analysts to collect data on certain goods.
On the whole, goods will be priced with a discount scheme along the lines of "Buy 3 of Good x and get 1 of Good y free" or "50% off Good x when you buy Good y". People tend not to question the complexity of these schemes, and just go along with it in order to save some cash.
The necessary economic theory
In economics, one refers to "price elasticity of demand". How it is calculated is irrelevant to this discussion. Essentially, it refers to how much demand for a good will change given a certain change in price. A good with higher price elasticity of demand (let's call it "more elastic") will need only small price changes to achieve large changes in demand. A good with lower price elasticity of demand (let's call it "less elastic") will retain similar demand even with large price changes. For example:
- Good x is more elastic. It is currently priced at $3. People currently purchase 10 units of Good x per day.
- Good y is less elastic. It is also priced at $3 and people also currently purchase 10 units of Good y per day.
- Both prices are reduced to $2.50. Sales of Good x increase to 20 units, but sales of Good y only increase to 11 units.
It is important to understand that different shoppers can have their own personal elasticities of demand for different goods. It must also be made clear that elasticity is a relative concept rather than absolute. Another key economic concept that draws on this theory is price discrimination.
Price discrimination is where the same good is charged at different prices to different people. For example, a hairdresser may charge a lower price to children than to adults. The reason they do this is that they believe children to have a differing elasticity of demand to adults. In other words, the price needed to maximise revenue from children is not the same as the price needed to maximise revenue from adults. By charging different prices they will maximise revenue from both groups.
How is this related to discount cards?
Once a customer has signed up to a discount scheme, all purchase details are stored in a massive database by the supermarket. By analysing these data, they can work out the individual elasticities of demand for different shoppers and for different goods. They might notice that some shoppers will only purchase certain goods at a lower price, for example:
- Group A shoppers love bananas and hate oranges. They have less elastic demand for bananas (i.e. you can push the price up quite high and they will still buy them) and similarly inelastic demand for oranges (i.e. however much you lower the price they won't buy them).
- Group B shoppers like both bananas and oranges, but will only buy them if the price is a bit lower. They have more elastic demand for both goods.
- Group C shoppers hate bananas and love oranges. Like Group A shoppers they have less elastic demand for both goods, but with reversed preferences.
Using the information gained from discount cards, the supermarket can quickly work out these elasticities (before discount cards, they could not do this). Now that they have the elasticities they might respond in the following way:
- Bananas will be priced at $3 per unit
- Oranges will be priced at $2 per unit
- A special offer will be made to discount card holders, "For every unit of bananas you buy, you get 50% off one unit of oranges"
Naturally, the special offer is "great value" to anyone who likes both bananas and oranges. Group B shoppers will take the special offer. Group A shoppers will buy bananas at $3 per unit, because the offer is useless to them. Group C shoppers will buy oranges at $2 per unit, because the offer is useless to them too.
Can you see what this has achieved? The supermarket have managed to persuade a whole new group of shoppers (Group B) to purchase bananas and oranges. Yet, they have still managed to sell them at the original price to Group A (bananas) and Group C (oranges). By using the data from the discount cards, they have increased their profits.
It could be argued that Group B shoppers have benefitted from the discount cards; but Group A and Group C shoppers definitely have not. In fact, now that the supermarket has divided its shoppers into groups, it can charge them all different prices. It can increase the normal price of bananas to maximise profits from Group A; it can alter the special deal to maximise profits from Group B; and it can increase the normal price of oranges to maximise profits from Group C. It is using the discount cards to practise price discrimination - wholly against the interests of the consumer. N.B. Prices would never be increased or decreased far enough that it becomes benefitial for a Group A or C consumer to take the special offer and throw away the good they don't want.
As you can see, "discount" cards do not save consumers money compared with a market totally free of discount cards. Supermarkets use them to operate a very effective and constantly changing form of price discrimination. Even worse, there is no really effective way for an individual consumer to "fight the system". Any sensible consumer has to use a discount card, because if they don't they will end up spending even more money.
In the UK, supermarket discount card schemes are currently being looked into by the Competition Commission as they are against the interests of the consumer. Perhaps government intervention is the only way to wipe out such schemes.
thanks to Cletus the Foetus for suggestions on improving the original write up