The Diminishing Marginal Utility Of Draft Beer

Feb 10, 2016

 

Draft beer is highly perishable and offers diminishing marginal utility – a combination that makes discounting larger servings a profitable approach.

 

Draft beer is perfect for only a very short time. It is perishable in that it becomes less enjoyable (warmer and flatter) very quickly.

And, at least for most people, it offers diminishing marginal utility even if it remains in a perfect state.

So, if you sell draft beer, it makes sense to discount larger serving sizes. The discount encourages people to buy more than they might otherwise, generating additional (but smaller) profit. And because the product is so perishable the customer can't stockpile it – they can't buy extra at the discounted price and save it for later.

This prevents cannibalization – losing sales at full price.In fact somebody who really loves beer is likely to order more smaller portions, because it means they will generally be enjoying the beer in a more desirable state.

 

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Category: Examples

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