2 What Supermarkets Don’t Want You to Know

Undercover Economist’ di Tim Harford - 2 What Supermarkets Don’t Want You to Know

• The scarcity power is clearly considerable, but it is not unlimited...the Dome proved a commercial disaster because uniqueness alone wasn’t enough to persuade people to pay enough to cover the vast costs of its construction
• Businesses with scarcity power cannot force us to pay unlimited prices for their products, but they can choose from a variety of strategies to make us pay more. ... .
• They could simply double the price of a cappuccino. Some people would pay the new price, but many would not.
• Alternatively, they could cut prices and sell much more coffee.
• That’s the dilemma: higher margins per cup, but fewer cups; or lower margins on more cups....by charging 60p to people who are not willing to pay more and £5 to people who are willing to pay a lot to enjoy the coffee and the view.
• How to do it, though? Have a price list saying, ‘Cappuccino, £5, unless you’re only willing to pay 60p’?... coffee bars have to be more subtle.
• Costa Coffee, who in the early 2000s used to have an elegant strategy: Costa offered ‘Fair Trade’ coffee to anyone willing to pay an extra 10p.
• Charging an extra 10p gave the impression that that was the cost of the fair trade coffee, but a customer who reached that conclusion would have been wrong.
• But why was it profitable to charge a higher mark-up on the cost of production on fair trade coffee than on normal coffee? ... The reason has nothing to do with fair trade at all: it’s because fair trade coffee allowed Costa to find customers who are willing to pay a bit more if given a reason to do so. By ordering a fair trade cappuccino, you sent two messages to Costa. One message may or may not have interested them:..‘I think that fair trade coffee is a product that should be supported.’ The second message is the one that they were straining to hear: ‘I don’t really mind paying a bit extra.’
• Starbucks isn’t merely seeking to offer a variety of alternatives to customers. It’s also trying to give the customer every opportunity to signal that they’ve not been looking at the price.
• Does this mean that Starbucks is overcharging all of its customers? No. If so, a regular cappuccino or hot chocolate would cost £3.30,
• There’s one born every minute: two ways to find him
• There are three common strategies for finding customers who are cavalier about price.
• The first is what economists call ‘first degree price discrimination’, but we could call it the ‘unique target’ strategy: to evaluate each customer as an individual and charge according to how much he or she is willing to pay. This is the strategy of the used-car salesman ...cars and houses, of course, but also souvenirs in African street stalls, where the impoverished merchant will find it worth bargaining for some time to gain an extra pound.... companies are trying to automate the process
• For instance, supermarkets accumulate evidence of what you’re willing to pay by giving you ‘discount cards’, you allow the stores to keep records of what you buy .......internet retailers such as Amazon can identify each customer by putting a tracing device called a ‘cookie’ on her computer. In Amazon’s case, customers started to realise that if they deleted the cookies on their computers, they were offered different, often lower prices.
• it must be reasonable for coffee shops to offer a discount to people who work nearby, and for tourist attractions to let locals in for a lower rate? It often seems reasonable because people in groups who pay more are usually people who can afford more....But we shouldn’t forget that this is a convenient coincidence. Companies ...are interested in who is willing to pay more, rather than who can afford to pay more.
• when I raise the price, how much do my sales fall? ...Economists tend to call this ‘own-price elasticity’... Tourists visiting Florida are less price-sensitive than locals... Being rich is sometimes connected with being insensitive to prices, but not always.
• The AMT coffee bar in Waterloo station in London used to knock 10 per cent off the cost of your coffee if – as I did at the time – you worked locally. ...The discount reflected the fact that local workers are price-sensitive despite being rich.
• The third way: turkeys voting for Christmas
• the company has to sell products that are at least slightly different from each other. So they offer products in different quantities (a large cappuccino instead of a small one, or an offer of three for the price of two)... even in different locations,
• Because the products are different, you never quite know whether the firm is using a price-targeting trick or merely passing on added costs. ... If it looks like price-targeting, it probably is.
• How far would you walk to save 30p?
• It was harder to find examples of identical products selling for different prices, although by no means impossible. Does this mean that Sainsbury’s doesn’t price-target as much as M&S? Not at all.
• It wasn’t that these products were more expensive in Tottenham Court Road than in Dalston (only the Vittel was), it was just that in Dalston cheaper substitutes sprang into view far more readily.
• Price-gouging the natural way
• It’s also good business to offer discounts to the elderly and to students (translation: charge higher prices to people likely to have jobs).
• The favoured game at the moment has to be price-gouging the natural way, riding the bandwagon of organic food. ...The supermarkets have come to the rescue with a plentiful supply of organic products that happen to be marked up far above their additional costs
• fruit and vegetable section contains both organic and conventionally grown produce side by side … but always side by side with a completely different product. The organic bananas are next to the ‘conventional’ (that is, non-organic) apples; the organic garlic is next ...The price-comparison would be too sobering.
• My recommendation, if you are convinced of the merits of organic food, is not to let food retailers exploit your enthusiasm: vote with your wallet by supporting any retailer – or direct supplier – who brings the price of organic and non-organic food closer together.
• Bargain shopping and bargain stores
• Wholefoods ...On hearing this, people would comment on how wonderful the store is... But my acquaintances also complain about how expensive Wholefoods is. But … is it really expensive?
• Safeway just five blocks away, a store known to the locals as ‘Soviet Safeway’ because of the small range of products and the harsh decor.
• when you compare the prices for the same goods, Wholefoods is just as inexpensive as Safeway.
• That doesn’t quite fit with our common-sense belief that some places are cheap and some places are expensive. But that belief never made much sense.
• Wholefoods is more fun to shop in... Wholefoods is not expensive in the sense that it charges more for the same goods. It is expensive because of where its price-targeting policies are focused: prices for the basics may be competitive, but the selection in Wholefoods is aimed at customers with a different view of what ‘basics’ are.
• So here’s my advice: if you want a bargain, don’t try to find a cheap store. Try to shop cheaply. Similar products are, very often, priced similarly. An expensive shopping trip is the result of carelessly choosing
• Mix it up!
• Another very common pricing strategy is sale pricing. ...But why knock 30 per cent off many of your prices twice a year, when you could knock 5 per cent off year-round?
• One explanation is that sales are an effective form of self-targeting.  If some customers shop around for a good deal and some customers do not, it’s best for stores to have either high prices to prise cash from the loyal (or lazy) customers, or low prices to win business from the bargain hunters.
• if prices were stable, then surely even the most price-insensitive customers would learn where to get particular goods cheaply.
• two supermarkets ...it’s hard for one to be systematically more expensive than the other without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices.
• The price-targeting strategy only works because the supermarkets always vary the patterns of their special offers, ...is too much trouble to ....comparing the price of each good
• But this is an example of a universal truth about supermarkets: they are full of close (or not so close) substitutes, some cheap, some expensive, and with a strong random element to the pricing. The random element is there so that only shoppers who are careful to notice,
• Reality check number one: does the company really have scarcity power?
• When we talk about big companies it is easy to get carried away with notions of how they are infinitely powerful ...often that scarcity is something we give them through our own laziness.
• what is the answer to the question we posed in the previous chapter: why does popcorn cost so much at cinemas?
• Customers may be dumb, but they’re not that dumb. People expect to be charged a lot for wine in restaurants and for popcorn and sweets in cinemas before they walk in the door. Now we have a better answer: it’s likely to be a price-targeting strategy.
• one of the big costs in a restaurant business is table space. Restaurateurs would therefore like to charge customers for dawdling, but because they cannot do that, they charge higher prices for products that tend to be consumed in longer meals: not just wine but also starters and desserts.
• Reality check number two: can the company plug leaks?
• sometimes it is more difficult to prevent the price-insensitive customers from buying the cheaper one. Some of the most extreme examples come from the travel industry: travelling first class by train or air is much more expensive than buying a standard ticket, but since the fundamental effect is to get people from A to B, it may be hard to wring much money out of the wealthier passengers.
• French economist Emile Dupuit pointed to the early railways as an example: It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches … What the company is trying to do is prevent the passengers who can pay the second-class fare from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich …
• The shoddy quality of most airport departure lounges across the world is surely part of the same phenomenon.
• In the supermarkets, we see the same trick: products that seem to be packaged for the express purpose of conveying awful quality. ... It wouldn’t cost much to hire a good designer and print more attractive logos.
• Starbucks offers a splendid example: the world’s most famous coffee company will serve you a better, stronger cappuccino if you want one, and they will charge you less for it. ... why does this cheaper, better drink – along with its sisters, the short latte and the short coffee – languish unadvertised? The official line from Starbucks is that there is no room on the menu board,
• Price targeting provides a far more convincing answer: while some companies make their cheap products look unattractive, Starbucks simply makes them invisible to those who don’t ask around.
• The first ‘leak’ in a price-targeting strategy, then, is that rich customers may buy cheap products, unless the products are deliberately sabotaged.
• The second ‘leak’ is ...that the customers who are being offered a discount buy the product and then resell it at a profit to the customers who are being charged a higher price. ... some products are inherently leaky: they’re expensive, easy to transport and non-perishable. The obvious examples are digital goods – music, video and software – and pharmaceuticals.
• For instance, the DVD industry agreed on a system of regional coding so that DVDs bought in the United States would not work in Europe.
• the same popular opinion that despises the DVD industry for trying to sell their products at different prices in different markets also believes that the big pharmaceutical companies should supply drugs to poor countries at discounted prices.
• When price-targeting is a good thing
• Imagine a hypothetical pharmaceutical company called PillCorp, which has developed a uniquely powerful new treatment for HIV/ AIDS. Assume that it doesn’t engage in any price-targeting and charges the same price across the globe.
• That looks like bad news. PillCorp is using its scarcity power to charge a high price for a life-saving drug. As a result, people in poor countries don’t get the drug.
• PillCorp could be making more money and serving the world better.... a taxi driver in Cameroon might be willing to pay only $50 a year for treatment;l... Because of PillCorp’s global price policy, the taxi driver loses out on the treatment, and PillCorp loses out on the chance to make some profit. But if PillCorp were able to make a onetime discount to the taxi driver ... That is what economists mean when we say a situation ‘could be better’.
• This assumes the cheap pills don’t ‘leak’ back, which in practice is a massive concern for pharmaceutical companies. .....Americans buy prescription drugs from across the border in Canada – a practice that can be illegal but is typically tolerated. Perhaps it is the Canadian policymakers who should worry: if the leakage becomes unbearable, the risk is that drug companies will simply refuse to offer discounts to Canada any more.
• When price-targeting is a bad thing
• Consider another hypothetical organisation, TrainCorp, a passenger train company. TrainCorp owns a train that always travels full. Some of the seats go at a discount of £50 to leisure travellers who booked in advance, to senior citizens, to students or to families. The other tickets cost the full price of £100
• We know at once – if we are economists – that this is inefficient. In other words, we can think of something that would make at least one person better off without making anyone else worse off. That something is to find a commuter who was willing to pay a little less than £100, say £95, and who decided to travel by car instead, and offer him a seat for £90. Where does the seat come from, since the train is full? Well, you take a student who is in no great hurry and was willing to pay a little more than £50, say £55, for the seat and politely throw him off the train. .... But of course, that’s not what happens, because if TrainCorp tried it, commuters who were willing to pay £100 would hang around for the £90 tickets,
• summary: the group price-targeting strategy is inefficient because it takes seats away from customers who are willing to pay more, and gives them to customers who are willing to pay less. .......individual price-targeting isn’t feasible.
• this book was published in hardcover at a high price, and then the paperback edition emerged later, at a lower price. The aim is to target a higher price at people impatient to hear what I have to say and at libraries. One good result is that the publisher will be able to sell paperbacks more cheaply, because some costs will be offset by the hardcover sales, and so the book will reach more people. One bad result is that the early version is much more expensive than it would be if there was only a single paperback edition, and some buyers will be put off.
• What if you had all the information you needed to never miss a sale? Would the world be a better place?...Can we say anything more generally about when private greed will serve the public interest? For the answers to all these questions, and more … read on.

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