Retailers are smart. They don’t just set a fair price for that shirt you see in the mall or the jar of jam you see in the grocery store. Everything is carefully packaged, priced, and presented to you in such a way that it will get you to spend more money.
Companies in the retail industry typically has lower profit margins than most other businesses — less than 5%. Grocery stores specifically have it even tougher with typical margins sitting at less than 2%. There are huge teams of analysts whose sole job is to figure out a way to sell you more stuff — even a 0.5% edge in a billion-dollar industry means huge money.
There are two clever tricks that retailers are using to get that extra edge.
Do you ever wonder why your Nutella, Ketchup, and Peanut Butter containers aren’t perfectly flat on the bottom? That shape isn’t just for show, it’s a huge moneymaker for big companies.
Imagine if every month or so you bought a container of Ketchup from the grocery store for $3. Then one day, as you stroll down the aisle to grab your delicious condiment you notice that the price of Ketchup is $3.50! What the heck! Most customers wouldn’t be happy at all with an increase in price.
But without raising prices, how is a company supposed to increase revenues?
After years of research on you and me, the buyers, they came to the conclusion that buyers will always hate an increase in price because we notice it. If you’re so used to seeing a bottle of Ketchup priced at $3, then seeing it one day priced at $3.50 looks like a huge rip-off. That price tag is screaming at you the second you see it.
So the researchers at the big corporations came up with a trick: let’s change something the buyer won’t notice at all, the shape of the container.
Maybe that $3 Ketchup container has 400 grams of Ketchup in it. To increase revenues by 10%, the Ketchup company would have to increase the price of the bottle to $3.30, which people would definitely notice.
So instead, manufacturers just change the shape of the container, creating a small indentation on the bottom, reducing the amount of Ketchup inside to 360 grams. People rarely pay as much attention to the number of grams, they just go straight to price as long as the container sorta-kinda looks like the same size.
Companies do this all the time. Do you ever notice that when you buy a package of sliced bread that there is an odd number of slices? Most people make sandwiches with sliced bread that use two slices at a time. To use all of that bread, you’d have to buy two packages, or else you’d end up with one extra slice!
Of course there are many other things like bags of chips that are half-filled with air and bottles with weird shapes.
These things are all calculated. We the buyers don’t notice the small difference in value. But for the big sellers, 10% could mean billions of dollars
A high price is not always an indicator of high quality. It can often be a trick that retailers, especially those in fashion and electronics, use to get you to buy the item they want you to buy.
What size cup of coffee do you order?
For about 85% of people, the answer is a nice in the middle medium size. Coffee shops know this, yet they still offer the small and large sizes. Wouldn’t it be easier for them to just offer the one medium size?
Yet again this is a well thought out play by the seller. The seller knows that buyers like to think they have a choice; no one likes to be forced into anything. A buyer wants to walk in and think that they themselves decided which side to get. What they don’t realize is that by offering the three sizes, the seller psychologically forces them to buy the medium.
The seller makes the large size huge on purpose and the small a terrible value for the price. You walk in thinking
Hmm the small isn’t quite big enough and is expensive for the size. But I really don’t want a large, it’s far too big! I’ll go with the medium
And guess where the shop aims to make its biggest margins? You guessed it, the medium.
Fashion retailers use a similar technique.
Walk into any fashion store and you’ll see a few items that stand out from the rest. They have the fanciest displays and the most ridiculous prices. Tiny handbags for $700 or a button-down men’s shirt for $500 bucks. There are always a few items that are far more expensive than the rest.
Those items aren’t there to be purchased. They’re there to act as psychological anchors.
If you walk into a store and see a handbag sitting on its own for $200, the price might look quite high. But that $200 bag looks far more reasonable when it’s sitting next to a $700 handbag.
The buyer sees the $700 handbag and thinks:
Wow that price is crazy! Hhmm this other $200 handbag is probably pretty good but way cheaper. I’ll go with that one
Most people can’t even guess the difference in price by looking at the 2 bags. In fact, the manufacturing cost is probably equal for them both. Most people, by only looking at them, would conclude that the 2 bags are similar in quality. But once you tell them what each one costs, their impression and judgment of the quality mirror the price.
Well played fashion people, well played…
Priceless: The Myth of Fair Value by William Poundstone