Wednesday, February 10, 2010

Pricing: Will you feel that you have been ripped off?

Feb 10, 2010

Our perception of pricing strategy is funny. A price increase in the face of stronger demand is acceptable sometime and feels like a rip off some other time!

Scenario 1:
California got battered by a series of storms a couple of weeks back. The day before first of the storms hit, I decided to get a raincoat for my son. I looked at the websites of local stores and decided on a raincoat from a national chain. Though they offered "buy online and pickup in store" option, I could not use it since I wanted the raincoat for the next morning.  So I used the old fashioned way: called the store up to make sure they had the size I wanted.  The lady at the store assured me that the raincoat in the size I wanted was in stock and actually it was on sale for 70% off.  I got to the store, got the raincoat and when the store associate rang it up, the 70% off was gone. The POS system had been updated with the new price and the store associates had not had the time to pull down the 70% off sign. Somebody at headquarters might have seen either the demand going up or seen the weather pattern and decided that the 70% markdown on the raincoat doesn't make sense in that store. But what ever the reason for the sales discount going of, I was not a happy camper. It looked like a bait and switch to me.

Scenario 2:
Milk prices have been at a low level for a long time. But in the past couple of weeks, they have started going up significantly. The reason is that milk demand has gone up while supplies have not gone up the same amount. I continue to buy milk at the higher price with out complaining.

If demand goes up and they remove the 70% markdown, why does it sound like a big deal to me, while the milk price increase for the same reason doesn't elicit the same visceral reaction? If knowing that the storm is coming through, they had doubled the price of an umbrella that I was going to buy, I bet I would have had the same reaction. A couple of years back when gas prices went up in the south east because of refinery problems, there was a big hue and cry to investigate the gas stations for price gouging. How is that different from milk prices going up?

What would your reaction be to sudden price spike in the face of a demand spike (weather related or otherwise)? Why do some price increases get a visceral reaction from you while other price increases don't?


1 comment:

  1. Karthik -

    May be the difference is our mind adjusts and rationalizes gradual change in prices easily, and grudges sudden shocks. Human preference for predictability and uncertainty avoidance.

    The same is true in the opposite scenario too. A typical employee will find more happiness in a sudden lottery than in a regular paycheck.