Articles

Pricing by location and occasion – an extreme example

In market research, pricing on June 11, 2013 by sdobney

Normally in competitive markets, prices tend to be driven down to a competitive equilibrium – or a least that is the economic theory for perfect markets. If two products are available at different prices, it’s expected that customers will choose the lowest price product. Flying back yesterday, I ran into one of the most extreme counter-examples in the airport. The newsagent and the drugstore were next door to each other, both open fronted to the concourse so you could clearly see in and both had shelves selling snacks and sweets on the wall dividing the two shops. But the price for chocolate bars on the newsagent side was £0.89, while the price for exactly the same bars on the drugstore side of the wall was £0.65. In other words a price difference of 27% within a matter of three metres. How was the newsagent sustaining such a big price difference?

Normally in pricing as a market research project, the price is examined for a broad audience. For instance, the product is placed in a supermarket or shelf-front display and shoppers are asked to choose. External factors which influence the choice are largely overlooked or ignored. However, for many convenience type products price is a relatively unimportant part of the purchasing decision. Soft drinks are a classic example where pricing is driven by location and occasion much more than the intrinsic nature of the product.

Within a few hundred metres of where we work, the price of 330ml of a soft drink will vary from around £0.50 to upwards of £3.00. As you might guess this ranges from the local supermarket to the local bars and restaurants nearby where the price is much higher. Customers though are very accepting of these differences because the drink is only part of what we are buying. In a pub or restaurant we’re more buying the experience of social or convivial drinking probably with the convenience of a meal, or accompanied by friends. We can’t and won’t opt to go and get the best deal by buying from the supermarket and bringing the drink to the pub.

The airport example is a little different. A traveller at a station or an airport will often only have a limited choice of outlets (sometimes only one) and the traveller may also only have a limited amount of time. Consequently suppliers have a quasi-monopoly as there is less competition. Travellers grudgingly accept they have to pay more for the convenience. Of course if the price is too high, the travellers just won’t use the retailer at all.

However, this also wasn’t the situation for the airport. Both the drugstore and the newsagent were ostensibly in the same place offering the same product. The product itself would have to be consumed away from the shop in both cases so it would seem fair competition should be at play and a customer would be crazy not to buy the lowest priced product. So why would the newsagent continue to be able sell at such a large mark-up (and remember the mark-up would be 100% profit)?

The main purchasing factors were the occasion and environment of the offer. The newsagent was not trying to make an individual sale. Customers were actually buying a number of magazines and papers to which they were then adding drinks and snacks to be consumed while reading. The chocolate bar was not the prime reason for shopping and the newsagent, by making it a convenient single purchase, was able to offer a simple bundle of products in one, instead of needing to spread the purchase across a number of shops. The price of the chocolate bar was not important in the sale as the newsagent had the exclusive on sales of magazines and newspapers.

The drugstore on the other hand was being used as a last minute store for cosmetics and toiletries. As a result it had fewer customers, and those customers in store generally weren’t looking for immediate gratification. Chocolate bars were not an intrinsic part of the shop offer and though the drugstore was competing on price and winning customers, it’s bundle offer obviously wasn’t as strong as that of the newsagent.

In setting prices outside supermarkets, other factors such as convenience, occasion and what else is being purchased can have a large impact on willingness to pay and the final available price from the customer.

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