During my recent vacation, there were multiple occasions where consumers expressed anger to me about prices they had paid or had refused to pay. The cases were all good illustrations of how people sometimes think about prices, and how they behave when making buying decisions. In my view, their actions were not always rational, and their anger had little to no effect. If the consumers really want lower prices, they need to change their buying behaviors.
I was vacationing in Western Michigan where summer life revolves around Lake Michigan and nearby smaller lakes. The community in which we stayed is relatively small and is served by one local grocery store, plus a Walmart, a Save-a-Lot discount store, and a convenience store near the resort. A woman complained to me that the price of Diet Coke at the local grocery store was nearly $5.00, which was “ridiculous”. She said she thought the price was $1.00 lower at Walmart and she did not understand why the local store charged so much. When I asked why she did not buy her Diet Coke at Walmart, she said “I don’t want to travel all the way out there and deal with the crowds.” I explained that she is receiving the value of her time and tranquility by shopping at the local store rather than Walmart. As long as she is willing to pay the premium price in exchange for avoiding Walmart, the local grocer had no incentive to lower prices.
The next two examples came from discussion with a couple from Florida. They had been shopping in the “downtown” area of the community (which is comprised of two blocks of shops), and they wanted to refill their gas tank. There are four of five gas stations in the area, two of which are within a mile of the downtown. Before buying their fuel at either of the nearby stations, the couple drove to all the stations to check their prices; and they drove back to a station near the central shopping area to fill up. The gas at the station in town was $.05 per gallon cheaper than the station near the highway (and Walmart). They said they thought the station near the highway was “ripping off” people with their higher price.
I told the couple that if enough people were willing to drive those extra miles to compare prices and refused to buy at the stations near the highway, prices at the highway would come down. That said, in my opinion most people who are already near the highway will prefer the convenience of buying their fuel at those stations. Furthermore, if their average fill-up is 10 to 15 gallons, their incremental cost would be $0.50 to $0.75 – unlikely to be worth their time or mileage.
The conversation about gasoline prices led to a conversation about air fares. The couple said they had flown to Michigan on Allegiant Airlines, which had the cheapest fares, but they hated the “nickel and dime” pricing used by Allegiant. The quoted fares are very low, but Allegiant charges extra for “everything.” Although there are no fees for bags that will fit under a seat, there are fees for checked bags and fees to use the overhead storage bin. The couple tried to beat the system by combining their clothes into a single, larger bag, but they ended up paying a $75 overweight fee for the large bag. The couple acknowledged they knew about the add-on fees before they bought their tickets. When I asked why they flew on Allegiant if they disliked the pricing practice so much they said, “Because it was cheaper.”
I told the couple Allegiant’s target market was price-sensitive fliers. All the services like overhead storage space, baggage handling, extra weight from oversized bags, water and sodas for passengers, etc. cost money. By making those things optional, the airline can offer lower fares to passengers who do not want those features. The couple said they understand but would rather pay a single fee, to which I replied, “Perhaps you should pick a different airline, and pay a little extra.”
My last example came when one of my in-laws said they were “gouged” for a loaf of bread at the Duck, a small convenience store near their cottage. “They know they are the only store near us, and they take advantage of us with their prices.” When I asked why people shop at the Duck if the prices are so high, the answer was, “People don’t want to drive 20 minutes to the grocery store or to Walmart just for a loaf of bread.” So, we are back to the value of convenience.
There was nothing unique about these vacation conversations. They happen among friends all the time. Customers make decisions to buy based on many factors, including price. Of course, customers would always like the lowest price and often complain when they don’t receive it. However, there are often other features that provide value to the customers, such as convenience, ease of ordering, helpful sales people, etc.
My advice to our consulting clients is to pay attention to what and where your customers purchase, not what they say. Conversely my advice to consumers is – don’t complain about prices. If you are not receiving value from whomever is charging you more, don’t buy from them. If the sellers lose customers due to high prices, those prices will come down. But if customers keep buying at the higher prices, the complaints are just noise.
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