Cross-Subsidization

Cross-subsidization is the organizational practice that uses a portion of revenue from some [Page 793]customers and applies it toward costs undertaken in activities for other customers. With cross-subsidies, a business may charge some customers more than the amount it requires to serve them so that its other customers can pay less. Managers who can subsidize across customer groups are able to achieve an overall business profitability that remains constant even while undertaking less profitable activities for some customer groups. Holding companies and diversified corporations are organizational forms that enable cross-subsidization as a path to competitive advantage.