Pricing is … Unintuitive
The other night a colleague from Ireland told me this story about his father. 
Jack managed a small grocery store in Ireland many years ago. In Ireland, Strawberries and Cream were a popular dish, so Jack would buy strawberries for a Shilling and sell them for 2 Shillings. (The numbers are made up, but go with the point.) However, the store was closed on Sundays, so any strawberries that were not sold by Saturday night were thrown out. And that is what they did.
Then Jack got a new boss.
When the new boss heard of the practice of throwing away unsold strawberries he told Jack to lower the price of strawberries on Saturday afternoon to a shilling. Jack protested, “we can’t make any money selling them for a shilling, that’s what we bought them for.” But he did what the new boss ordered. They sold all of their strawberries by the time the store closed on Saturday, but many of them only at their cost.
As my friend tells the story about his own father, “It wasn’t until Sunday afternoon that he suddenly realized how brilliant this was.”
What makes this brilliant? Two things:
First, purchasing the strawberries was a sunk cost. Once the store owned the strawberries, they would either sell them or throw them away. It is better to sell them at cost, or even below cost, than to trash them. The choice is some revenue or none. Pretty obvious when you look at it that way. Sunk costs (dollars already spent) are never relevant to pricing decisions.
Second, customers who bought the strawberries (at cost) also bought cream. The store made plenty of money on cream. Notice that this is an example of pricing a product portfolio with complements. Pricing aggressively on one product, strawberries, influences the sale of complementary products, cream, at better margins.
If you are a regular reader of this blog, then you probably immediately saw these two points in Jack’s story. For you experienced pricers, here is your lesson from this story. Those around you who don’t study pricing probably didn’t get these two points until after they were explained. The world is full of Jacks. Not stupid, just not aware of the nuances of pricing. We are always teaching.
Mark Stiving, Ph.D. – Pricing expert, Speaker, Author
Sign up for the Pricing Perspective to get a monthly recap of these blogs plus more insights on pricing.
Photo by Darwin Bell
What would Jack do if he realizes, that customers that usually come in the morning anticipate Jack’s pricing scheme and postpone shopping to Saturday afternoon? This will make him lose all margin.
@Patrick Valid point. However, the store did still make money by selling cream. The store is at risk of losing a shilling from people who would have bought at 2 shillings anyway. In fact some buyers are strategic and plan their shopping for Saturday afternoon hoping to buy strawberries on sale.
Ideally the shop plans their inventory to not have leftovers on Saturday. And if they used yield management, they would know what time to put the strawberries on sale to move the last one just at closing. Isn’t it great living in these days with such awesome data and tools?
Another point. Think about airline pricing where every customer pays a different price for the same quality of service. As soon as customers recognize that they paid too much – regardless of their wtp – they will be dissatisfied as they feel ripped. How can Jack handle this?