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.

Vitacost warns customers about an order limit on this Tom's of Maine soap while at the same time discounting the price of the soap.
Vitacost warns customers about an order limit on this Tom’s of Maine soap while at the same time discounting the price of the soap.

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.

Plenty of room left in this box for more Tom's of Maine Soap!
Plenty of room left in this box for more Tom’s of Maine Soap!

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!

Grocery Pricing: When A Sale Is Not A Sale

The topic of pricing is one of my favorite on this blog. Over the years, I have developed a keen sense of pricing dynamics. So when I find (apparent) pricing anomalies, I feel compelled to talk about and explain them.

I made a quick 2019 New Year’s Eve run to Target and decided to take a quick trip through the grocery aisle for some breakfast options. My eyes soon landed on an old favorite, Corn Chex from General Mills. The cereal was one of the few sales Target offered at the time. Almost without a thought I reached for the 12-ounce box which was attractively priced at $2.50, a whole $1.49 lower. The 37% discount looked like a steal!

However, me eyes drifted to the even bigger 18-ounce family size Corn Chex, and I got distracted by a decision. At $3.79 a box, this jumbo-sized offering surprisingly cost 20 cents less than the regular price of the 12-ounce box! The 18-ounce box cost 21 cents/ounce. At the sales price, the 12-ounce box also cost 21 cents/ounce. Suddenly, Target’s sale did not seem so attractive. Since I love Corn Chex, I put the smaller box down and put the bigger box in my shopping cart. If I am paying the same effective price, I do not need the sale.

So what gives? Most likely, Target charges slightly more for the smaller box to encourage consumers to buy the bigger box of cereal. Surely the decision is easy for large families with a lot of corn Chex eaters. The only people who would pay 20 cents more for 6 ounces less of cereal are people who have no room in the pantry for the bigger box. Consumers who are solely focused on quantity over price might also pay more for less. Either way, Target makes a sizable margin on those sales. When customers purchase enough of the bigger box, Target uses the appearance of a sale to push the smaller box out the door. Target “anchored” consumers to the $3.99 price point for the 12-ounce box, so $2.50 looks like an incredible deal. With the “sale”, the only people who will buy the bigger box are people like me who truly want to eat a LOT of Corn Chex.

Retail stores use regular prices to anchor their customer’s measurement of value. Anyone who shops regularly at Target looks at the Corn Chex sale and sees a fantastic bargain. Target just sees the end of their opportunity to gain out-sized profits from people who are not paying attention.

The lesson? Pay attention to your price per unit of measure and decide accordingly! Sometimes a sale is not really a sale…sometimes a sale is just the end of a non-bargain.

Target's sale on the 12-ounce box of Corn Chex just brought the price per ounce in-line with the 18-ounce box of corn Chex.
Target’s sale on the 12-ounce box of Corn Chex just brought the price per ounce in-line with the 18-ounce box of corn Chex.

Amazon’s e-Book Pricing Problem

I intended to write a detailed examination of Amazon’s pricing problem with e-books. However after doing just a little research, I found there are plenty of people who have already provided excellent opinions and recommendations. So, instead of providing my classic unsolicited advice, I am posting links to the two most insightful pieces I found in addition to a general news story if you just want an overview on current events.

General news
ChannelWeb: “Amazon Gives In To Publisher’s Demands For Higher E-Book Prices”
BusinessWeek: “Amazon’s E-Book Price Reversal: A Mixed Blessing” – considers the impact of pricing on demand for e-readers and e-books.

Opinion
The Big Money (Marion Maneker): “Amazon’s Self-Defeating War on Publishers”
Tobias Buckell: “Why my books are no longer for sale via Amazon”

Maneker recognizes that sales of e-books will inevitably dominate sales of physical books and recommends the following:

“There is…a compromise that might benefit all parties. Amazon has been pushing the Kindle to heavy users of frontlist books. But the agency terms offer an opportunity for backlist books that gives everybody a win. With the agency model, a backlist book becomes a goldmine for publishers, authors, Amazon and Apple. Priced at $9.99, the publisher receives pretty much the same amount of money under agency terms as it would have for the wholesale book. Still protecting their preferred terms for electronic books, the publishers could maintain their 20-25% of net receipts formula for author royalties because the author would be getting more money ($1.75 vs. $1.05 in paperback royalties on a $13.95 physical paperback). Leaving the publisher with $5.25 in margin, more than they’d get from the physical paperback. When you include the savings in paper, printing and binding, freight and warehousing, the margin jumps even more.

This detente would flood the book market with titles that have stood the test of time where demand remains strong–a good incentive for Kindle and iPad buyers–while protecting the physical book distribution business. It would also buy publishers some time to divest the distribution assets that will inevitably erode as e-book selling takes off.”

Buckell write an extremely long piece, but it is worth the read given it comes from a concerned author. He laments that Amazon is attempting to abuse its market power to fix prices and thwart publishers’ ability to implement dynamic pricing. Buckell also describes process of making books in extraordinary detail. He explains his interest in writing this piece in personal terms:

“I’m not trying to exhort anyone to do anything, but to explain the situation I’m in, and to educate. I’m seeing a lot of people state things with certainty (points I try to knock down above) who have no involvement in the trade.

A lot of readers are going to take this out on authors, and I wanted to basically show my homework to explain things that people may not be aware of. People toss out prices of what eBooks ‘should be’ who’ve never even stopped to understand how the math of something like this works. They demand things they’d never demand of a jacket salesman, just because they think economics and supply and demand and volume don’t apply to eBooks. They do.

Seriously. I’ve thought about these things a lot. Mostly because I have a novel series that has not been renewed, and I keep running the numbers to see if I could write it as an eBook, and when I run these numbers, I come up looking at making a few thousand dollars for half a year’s worth of work based on how eBook sell now. Yes, there are a few J.A. Konrath’s selling well on Amazon, but as I’ve linked, other authors aren’t automagically selling thousands of eBooks there. Most who follow these footsteps sell hundreds. Not everyone becomes JK Rowling.”

The last point reminds me of Nassim Taleb’s “The Roots of Unfairness: the Black Swan in Arts and Literature“. Taleb notes that artists and writers work in a field where a few successful people take the majority of the rewards in the industry. He attributes this situation to largely unrecognized random events (luck!) that are highly improbably but have large impact (“Black Swans”). Moreover, he observes:

“The occurrence of the Winner-Take-All effect in any form of intellectual production has been accelerating along with the speed of reproduction and communications.”

So, ironically, e-books will continue the democratization of publishing and reading (through convenience, easy access, and low costs), but the percentage of winners may narrow further even while providing those winners more wealth than ever.

Pricing Program at the UC Berkeley Center for Executive Education

The UC Berkeley Center for Executive Education is offering a 4-day pricing program called “Pricing for Profitability in the Information Age“, April 27-30, 2010 and November 15-18, 2010.

Here is the intro and program description provided by the program’s website:

“Companies leave millions, sometimes billions, of dollars on the table every year through sub-optimal pricing practices. The current abundance of customer data, in the context of increased global competition and the instant information sharing made possible by the internet, requires companies to not only set the right prices, but to continually monitor and refine pricing.

The four-day Pricing program at the UC Berkeley Center for Executive Education equips managers with proven techniques for assessing, formulating, and monitoring pricing strategies. Participants will learn several powerful principles of pricing, and will explore innovative approaches that take full advantage of the rapid changes brought about by the information age. The tools developed in this course will enable participants to fully integrate the 3Cs of pricing (Customers, Competitors, and Costs) into the best price for your products.

At the end of the program, participants will be awarded a certificate of completion by the UC Berkeley Center for Executive Education.”

Changing pricing and merchandising strategies in retail

Stephanie Rosenebloom writes in the New York Times: In Recession, Strategy Shifts for Big Chains (June 20, 2009). Retailers continue to re-engineer the industry to maintain positive profitability. The recession has forced the hand of several major retailers to bring prices and product offerings in-line with the new frugality of consumers.  Luxury retailers are broadening the product mix to include more mid-priced product.  Mid-tier retailers are offering fewer product options but trying to make up for it with premium service  levels. Most interesting: “One of the biggest changes consumers are likely to see is greater personalization and regionalization of merchandise.” Looks like more progress for the concept of “mass customization.”

Where margins are already slim, pricing strategies have limited ability to enhance competitiveness. Retailers are doing well to re-orient their supply chains around getting the right product at the right time to the right customer. Wal-Mart has been doing this for years by empowering employees at individual stores to report on merchandising needs.

It will be worth monitoring the changing landscape in retail for lessons in other high-touch businesses.