Thursday, October 13, 2005

Grocery Store Pricing

From Marginal Revolution, the following is an excerpt about grocery store pricing from a new book coming out called The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor -- and Why You Can Never Buy a Decent Used Car by Tim Harford.

Companies find it more profitable to increase prices (above the sale price) by a larger amount on an unpredictable basis than by a small amount in a predictable way. Customers find it trouble some to avoid unpredictable price increases -- and may not even notice them for lower-value goods -- but easy to avoid predictable ones...

Have you noticed that supermarkets often charge ten times as much for fresh chili peppers in a package as for loose fresh chilies? That's because the typical customer buys such small quantities that he doesn't think to check whether they cost four cents or forty. Randomly tripling the price of a vegetable is a favorite trick: customers who notice the markup just buy a different vegetable that week; customers who don't have self-targeted a whopping price rise.

I find these pricing strategies pretty interesting, and I can verify that they happen from my work on pricing strategy with an unnamed company that is headquartered in Atlanta. Now as opposed to more comments on why you think corporations are evil for such tactics, I would like to see a good reasoned comment on why this is not an "evil" thing to do, pehaps even other ideas of how to price along these lines, or other pricing strategies you or your parents may have noticed at the grocery store.

Source: Marginal Revolution


Jean Stricklen said...

The old saying 'caveat emptor' isn't selective. Consumers have a responsibility to check prices. They are not required to buy certain selected items but can choose from many.

Dingo said...

Good blog you have here. It is very well written and most importantly, interesting.

Anonymous said...

I think that any company has the right to raise prices to however high they want. It may seem evil, but in realityit is the consumer's responsibilty to check prices and manage their spending. Uping the pricing on various low priced goods is a good may to make more money becuase the typical consumer will not even notice. Another idea, slightly more "evil", would be to offer a certain price for a set amount of goods. Consumbers rarely compare the actual price of one good to the seemingly amazing deal for 5 of the same product. They make it seem like you are getting a good deal when u are really just buying an uneeded amount for the same, or slightly higher, price as you would if you got just one. A good example is stores like Costco that sell in bulk for good prices. This strategy brings in more money by selling in larger quantities when the average consumer typically won't compare the price per item in a 12 pack to the normal price of one of those same products. Overall this is a good strategy that stores use to make a profit off of consumers lack of caring.

Anonymous said...

I think that the pricing strategy is completely fair for the consumer, because most people would rather pay an extra fifty cents than to go and compare the prices with other brands. And it's not like the company is deceiving the consumer because the price they're charging is the one displayed. Another strategy similar to this one is raising the price of something and calling it the "Old price" and then giving a discount. People love the idea of saving money, so they'll go for the "discounted" item even if the price is actually the same, and they'll probably buy more of the item because it's such a great deal.
Jessica W

Anonymous said...

The pricing strategy is by no means evil. Any grocery store like Publix or Kroger always has a catalog at the front of the store to show items that are on sale or reduced price, and if that doesn't grab a consumer's attention, then the "buy one get one free" signs posted throughout the stores would. Although the hiked prices in flora might catch a few careless consumers, they also make up for the items bought that have a ridiculous sale on them.

David Wyant

Anonymous said...

This is a good strategy for stores to use. It can earn a great deal of money from casual customers who don't check prices, either because the customers are careless or the money saved isn't worth the time it would take to check prices. Because grocery stores constantly switch which goods are on sale and which are priced higher, customers will always either be able to buy a similar substitute or wait a week for the product's price to go down. From my bag-boy experience, I've noticed that many customers are very responsive to price changes. They know what items are on sale when and always double-check their purchase at check out. Often they will find that the sale for an item they bought recently ended, so they will refuse to purchase the item (and I will have to wander through the store looking for where to return the item). Even if the price is only 20 cents higher, they will not buy it. Therefore, I would guess that the huge price increases on some items rarely fool consumers. Very few people are completely oblivious to the price changes of a good, even very inelastic ones like food from the grocery store.