Tuesday, February 8, 2011

Bananas, eggs and irrationality

The prices of fruit and veg are on Australian minds at the moment as we grapple with the devastating human, economic and environmental aftermath of flood and cyclone.  Bananas have topped $5.98*/kg (from a seasonal average of $2-$3) and many other crops and forms of produce are likewise facing price adjustments. At the same time, Woolworths and Coles have dropped the price of milk and butter in the hopes of luring more people through the door.

Shelf pricing reminded me of something the Brafman brothers wrote in Sway: The Irresistible Pull of Irrational Behavior; "If you reduce the price of eggs, consumers buy a little more. But when the price of eggs rises, they cut back their consumption by two and a half times".  The lesson was that the satisfaction of purchasing discounted eggs was far less powerful than the pain of paying more.  Can you picture yourself in this circumstance?  I know that I have recently walked past nectarines because they were $1/kg more than the week prior - that means I have elected to go without this gorgeous fruit because something deep in my DNA wouldn't let me spend more than the last time I'd bought them.  Rational? No way. What have I done with that massive $0.40 saving? No idea - probably spent it on a more expensive and less healthy snack. 

(Bonus question for those who have read my previous blogs, was it the Elephant or Rider at play? Answer below.)

So what's the egg lesson for marketers?  Don't underestimate the impact of your pricing adjustments. If you rely on a regular purchase cycle that is also a discretionary purchase, be prepared for your price rises to drop volumes more than your discounts will increase purchases.  Whilst this may not be new - we're really talking about the perennial debate between yield (more from each customer) and volume (more customers) - the magnitude of price increases vs decreases on behaviour (2.5 times for eggs) is what's interesting and possibly deserving of your attention.

* As an aside, many of the news outlets are speculating that bananas will end up at $15/kg because that's what happened on the back of Cyclone Larry in 2005.  Suddenly $5.98 doesn't seem so bad. Why? $15 has become the new psychological anchor price against which anything else will seem reasonable.

  Ans: Elephant of course. If my executive/rider mind had been engaged I would have happily paid $0.40 more because it makes sense on a rational level.

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