Sure, We Know That…

Or at least we should all know that:

The report – which scrutinised the labels of 54 ready meals from Asda, Morrisons, Sainsbury\’s and Tesco – says that while the difference between premium lines and standard lines are noticeable, the difference between budget and standard ranges are less obvious, with the ingredients often appearing remarkably similar. Often the only difference is extravagant wording on the packaging.

Tesco, for instance, says that its standard bolognese is "produced in the UK using beef from a welfare-assured source". In fact, its value bolognese contains exactly the same meat, but refrains from boasting about it on the packaging.

Segmentation I think it\’s called. Or is it price discrimination? You as a producer know that there are some people who are happy to pay a higher price for your products than others are. What you want to do is keep the low priced business (which is after all profitable) but find a way to shake those extra pennies out of those willing to pay more. So you charge more for silly things and see what happens. It might be the above, telling people about some feature. It might be Starbucks offering, for a fee, to shake and stir the sugar into your iced tea. It might be, in the metals trade, labelling your alloy "aerospace grade" and "commercial grade", even though they\’re the same. But of course the aerospace grade is higher priced because you "guarantee" that it meets certain chemical standards, while commercial grade simply meets them (true story btw).

Now you can look at this two ways: one is that suppliers are trying to rip off customers. The other is to look a little more deeply. It\’s a standard assumption that in a perfectly competetive market there should be no profits over the cost of capital: any that did exist would be competed away. This sort of segmentation is the response to being (or thinking that you as a supplier are) in such a competetive market. Yes, perhaps it is true that this is "ripping off the consumer" but what it tells you is that the suppliers think they\’re in a competetive market.

It\’s a slightly cock eyed manner of looking at it, I agree, but interesting as well: the very fact that people are doing these things to avoid being in a perfectly competetive market shows their underlying assumption, that they are in one.

7 thoughts on “Sure, We Know That…”

  1. IANAE, but I remember reading a popular economics book called ‘The Undercover Economist’ that deals with just this type of marketing tactic.

    Tim adds: Indeed, guess where I got it from? (I was one of the reviewers for a newspaper of that book).

  2. A similar anecdote a friend told me some time ago: Burger King whilst trying a new product in their restaurants sold it for a ridiculously cheap price, only enough to cover the cost of producing and serving it to their customers. It was widely rejected by the consumer and in studies the main issues surrounding its poor sales was ‘price’. A clever marketing individual decided to remarket the product as a special item, quadrulpled the price and repackaged it with slightly more but inexpensive packaging – the product this time became one of their highest selling introductory products.

    Consumers are wierd – mind you I spent £300 on a new Xbox 360 “Elite” when my old one broke – I could get it repaired for free by microsoft but I wanted the bigger hard drive (which you could buy separate). In truth I really think I wanted it for its black veneer…

  3. Its not just shoppers who feel better by paying a higher price.

    When I was in the consulting business, often supporting management consultants, we found it easier charge a relatively high fee than a lower one.

    The reasoning seems to be that in this business end clients feel they are getting someone (because thats really what you are paying for) with more experience and nouce, even though they often had the CV of the consultant.

  4. Thom, I know that happened with KFC’s spicy chicken range, whereby uptake was low until they started charging an additional cost for it over the “original recipe”. Many consumers conflate the concepts of price and quality.

  5. Tim, why say the consumers are being ‘ripped off’? They know what they are buying and they choose to pay a higher price for it. Unless the packaging actually said ‘this is in some significant way better than the value brand’, then let the dummies spend money on nothing.

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