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Price targeting

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Monday, Jun 5, 2006

Financial Times columnist Tim Harford in his recent book The Undercover Economist spends a lot of time discussing the retailers’ practice of price targeting, by which they inflate their profits by duping customers to paying what they can afford for something rather than what it actually costs to make. Generally speaking, he argues, everything at Starbucks costs the company the same amount to make, they just dress their base product (espresso) with a bunch of inconsequential options that permit them to charge a bunch of different prices for the same thing and allow customers to self-select their price range, (dumb or dumber or venti dumb)—if you mistake those little differences for significant identity-defining decisions, you’re just that much more suceptible. Much of the economy in fact sems predicated on our finding mammoth significance in these inconsequential differences; advertisements systematically instruct us to take great pleasure in determining the difference between someone who drives a VW and someone who drives a Ford truck. 


Harford focuses on customers’ insoucient shopping. “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.” Part of that indifference would likely be Veblenesque conspicuous hauteur, but part of it is a consequence of deliberate deception, inculcated shopper ignorance abetted by such tactics as random pricing, illogical sales, exaggerated differences between similar products (if not the same product), misleading labels, sabotaging already finished goods to price them cheaper and so on. All these things are designed to confuse, to create situations of imperfect information which can then be exploited. Like a true economist, Harford sheds no tears for customers who are duped into paying more than other customers for the same product; he figures that they know better what they can afford (though the mountains of American debt and the existence of paycheck-loan kiosks and rent-to-own predators and installment-plan scams often makes me wonder, personally) and sees nothing unjust in a little enterprising duplicity.


Customers tend to feel differently. Some, when they discover these practices, perhaps engage in some guerilla consumerism, turning bloated corporate policies against chain stores, capitalizing on slipshod return policies, buying sale items in absurd bulk, exercising iron discipline with price comparisons, and speading the news of these counterinsurgent tactics to anyone who will listen and who has the nerve to execute them. As Harford notes, price targeters must plug leaks—must stop goods targeted for one group from selling to another. In other words, they have to stop middle class people from shopping at Dee & Dee or Dollar General. And retailers must stop people from reselling goods they’ve acquired at a discount—this is why these strategies are mainly applied to services and perishables. Price targeting typically takes advantage of our willingness to pay for an experiential goods (rather than tangible ones) like first-class seating or to get competent attentive service from clerks. The hierarchy of customers that results makes custoemrs think their opponents are other customers (who they need to best by being in a higher class, by being waited on first) rather than the retailers themselves who are gouging and duping htem whenever possible.


Part of the way price targeting works is to have a sheeplike shopping populace to embarrassed to protest it, or to incovenience themselves, the clerks, and other shoppers by insisting on refunds or price matches or spontaneously-negotiated bargains. Of course, even if you are aggressive in taking advantage of shopping loopholes, you are still shopping, which probably keeps retailers happy, no matter how much you shave their margins. Perhaps the best way to fight price targeting is to buy as little as possible, or at least spend as little time as possible thinking about acquiring stuff.

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