Scarcity Pricing: Why Discount When Supply Is Constrained?
I prefer soaps with no additives, scents or other assorted chemicals. Accordingly, I have purchased Tom’s of Maine natural soaps for almost 20 years after a dermatologist introduced me to this friend of sensitive of skin. The soap is a bit expensive and sometimes hard to find. So when I find a reliable source, I stick with it and buy in bulk. Unfortunately, Vitacost.com, my latest supplier, recently restricted orders to 3 bars of soap per person. I am not sure whether the company is suffering supply constraints as a result of the coronavirus pandemic, but I am mystified by the company’s approach to scarcity pricing. Despite the supply constraint, Vitacost discounts the price of this Tom’s of Maine soap.
I first emailed Vitacost for more information on the ordering policy. Customer service explained: “Unfortunately, due to the high demand of this product, we have placed a limit on how many you can order at once. This is in place so that every customer is able to enjoy the product.” The demand is relatively high because Vitacost cannot supply all the soap customers want. Still, this rationing policy surprises me. The soap is not a critical, life or death product. After my last order, I realized the company’s scarcity pricing is inconsistent with such high demand.
I emailed Vitacost again for answers. Customer service responded with a non-answer:
“Thank you for contacting Vitacost.com. We appreciate your candid comments about the quantity limit and pricing of the Tom’s of Maine Sensitive Natural Beauty Bar Fragrance Free — 5 oz. . We are always looking for ways to improve your experience, which is why I’ve sent your comments to the appropriate department for further discussion.”
Companies should charge higher prices for high demand products. The price should increase until demand balances with supply. Vitacost should not discount the price. For example, the company could raise the price until the average order reaches around 3 bars of soap. Vitacost could even use those profits to motivate its supplier to invest in more capacity or divert supply from other retailers. (I would love to know whether the wholesaler is also under-pricing the soap!). So why does Vitacost apply a discount for its scarcity pricing?
Perhaps Vitacost uses this soap as a kind of “loss leader.” The reasonable cost keeps customers coming back to the site to shop for other products. Those other purchases should deliver more profits than Vitacost loses from the discounted scarcity pricing. However, the company risks losing single-product customers like me who are now hunting for alternative retailers. For example, I will pay retail price if I can get a lot more soap.
I prefer to buy in bulk both to make sure I have plenty of supply on hand and to reduce the per unit cost for shipping. Now, I pay $4.95 to ship just three bars of soap. This kind of ordering increases my costs. I pay more to ship each bar of soap. I also spend more of my time ordering soap. Moreover, the odds go up I will experience the frustration of running out of soap at exactly the wrong time.
Can you think of any other (rational) reasons that explain Vitacost’s discounted pricing on a highly popular product? I would love to hear about it!
Adding to the mystery, Vitacost recently dropped the price of the soap even MORE. The limit of 3 bars of soap still stands but now the price per bar is $3.65. Another 17% reduction for a product that is in limited supply.
Meanwhile, this limitation has forced me to look for alternatives. I found one in Whole Foods. The price is $4.45, just 6 cents above the previous Vitacost price. Needless to say, I am stocking up…