I recently talked about a local butcher and how they use two different pricing models, or expressions of price, to make the same product, at the same price, appeal to different types of customers. This example looks at a retailer offering identical products at different prices, just a few feet from each other, in the same store.
The retailer is a big electronics & entertainment store and I first noticed this when I went shopping for a specific DVD. I (naturally) went to the DVD > Movies section where all the titles are organized alphabetically on racks. I found the one I wanted easily, priced at $17.99, and took it to the cash register.
While waiting there I flipped through the big bin of discounted DVDs (like the one shown below) you always see in that kind of store. In there was the same DVD I had just taken off the rack but priced at $6.99 instead of $17.99 – a savings of more than 60%.
Of course movies are often released in many different versions. Take a look at the two photographs below, showing seven different versions (at five different prices) of the same movie for sale in the same store on the same day.
That kind of versioning (differential pricing and product differentiation) is a different topic but the point is that I could very well have been looking at two different versions of the same movie and that could have accounted for the difference in price.
I looked long and hard. I even waved the person behind me in line through so I could take more time and be sure. It was the same movie with the same features in identical packaging. The only difference was the price and the internal store SKU. I assumed it was some kind of error that worked in my favor and bought the less expensive version, saving more than $10.
Since then I have realized it can’t be an accident simply because it happens too often. On my last trip to the same store I looked at the first two titles in the discount bin and then tried to find the same titles in the alphabetized rack. You can see the side-by-side results here:
From The Alphabetized Rack
From The Discount Bin
From The Alphabetized Rack
From The Discount Bin
It seems crazy but the retailer is actually being incredibly smart. They are recognizing that each movie has at least two different kinds of customers.
One type of customer comes looking for a specific title and, naturally, goes to the alphabetized rack to find it. This customer places a relatively high value on the movie. They came looking for it specifically and are presumably prepared to pay what most of us would consider the typical price for a DVD on the rack (as opposed to the discount bin)…. usually somewhere between $10 and $25.
The bin targets a different type of customer. The bin targets the impulse buyer, idly flipping through titles as they wait to check out. These buyers generally place a lower value on a particular title. They probably didn’t come to the store shopping for it…. but if they stumble across it at a heavily discounted charm price? They might just go for it.
Does the store lose some potential profit? Does the discount bin cannibalize full price sales from the alphabetized rack? Probably not much. Most buyers in search of a specific movie are going to go to the organized rack first. They might later stumble across their title in the discount bin the same way I did but I been buying DVDs for more than ten years before that happened. It never even occurred to me that the same item would sell for two different prices in the same store.
On the other hand they increase sales (and profits) by selling more movies to impulse buyers. Obviously the profit on the movie from the discount bin is smaller than the profit on the DVD from the rack, but it is still profit that the store wouldn’t have realized otherwise. It is a very efficient way of allowing customers to segregate themselves based on the way they value the product.
It is also a beautifully constructed hurdle to the dedicated bargain hunter. If you happened to come across a movie in the bin it is very easy to then go to the alphabetized rack to check and see if you are indeed getting a bargain. In comparison you are – the DVD from the discount bin seems like a great deal, and you are even more likely to buy it.
It doesn’t work nearly as well the other way around. If you are looking for a specific movie simply pawing through all of the discount bins is not very efficient. But, if you are prepared to do that and find the movie you want, you proved that price really was your priority by jumping over that hurdle and earning your savings.
This is a great example of price discrimination – charging different prices for an identical product.
I work with a lot of florists and this is a great reminder that not all customers are the same. For example the customer that calls to order flowers for the birthday of their spouse is very different from the commuters that drive by every day - potential customers that might be motivated to stop in for a cash and carry special, affordably and effectively promoted with a banner or mobile sign. One customer values the convenience of ordering over the phone, the other values the convenience of being on their daily commute and the discounted pricing.