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How retailers "sabotage" their own cheap goods

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Friday, Jan 6, 2006

Because we are not in the habit of haggling (a happenstance greatly advantageous to retailers), we have the tendency to think there is a sound objective reason that goods are priced the way they are, that there is some relation to what they cost to make and distribute. But that assumption, though comforting when we are the heat of acquistiveness, as it assures us that we aren’t being taken for a ride, is in the end extremely naive, as prices depend not on costs but on what the customer is willing to pay. Affluent customers, because they don’t need to count every penny of their disposible income and perhaps because they are most abstracted from the real cost of things, are easy targets for this kind of margin padding.


Tim Harford explores this phenomenon in regard to notorious price-inflaters Starbucks in this Slate article, which also features some helpful hints at how to get your coffee money’s worth. He points out that the “short cappuccino” is optimal milk to espresso beverage, but it is rarely advertised or even featured on the menu because it sells cheaper than the venti monstrosities the company earns most of its profits with. Harford attributes this to Starbucks aggressive pursuit of “price-blind customers,” the free-spending sybarites who have helped the company build its coffee empire. “The difficulty is that if some of your products are cheap, you may lose money from customers who would willingly have paid more. So, businesses try to discourage their more lavish customers from trading down by making their cheap products look or sound unattractive, or, in the case of Starbucks, making the cheap product invisible. The British supermarket Tesco has a ‘value’ line of products with infamously ugly packaging, not because good designers are unavailable but because the supermarket wants to scare away customers who would willingly spend more. ‘The bottom end of any market tends to get distorted,’ says McManus. “The more market power firms have, the less attractive they make the cheaper products.’ ” That means that as the mom-and-pop coffee shops are bullied out of business by Starbucks, Starbucks can make their cheap but better cappucinos more and more invisible to their own customers, steering them toward more wasteful product. And as supermarkets eliminate small groceries, they can make their generic brands seem like so many turds on the bottom shelf while encouraging shoppers to buy inflated brand-name goods.


This same principle extends into attempts to embarass customers for asking for cheaper goods or pursuing promised discounts or using coupons and so on. If clerks are slow in processing these promises, other customers will do the embarassing for them, growing impatient in lengthening lines as managers are summoned and register keys are futilely punched in searching for the means to actually take the 10 percent off as advertised.


The point is that retailers knowingly subdivide their customers into classes (and RFID tags should only make this easier) and they try to make their little class system meaningful to consumers with petty instances of preferential treatment that cost nothing when compared to the bigger profit margins they earn on these first-class dupes. They hope you’ll resent the other customers when you are forced to worry about what they’ll think when you complicate things at the checkout, rather than resenting the retailers themselves. But if the retailer is the only game in town, directing resentment at it won’t accompish much—that’s just one of the perks of monopoly.

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