Archives for September 2009

Price Targeting, Coffee Shops, and Supermarket Secrets

September 3, 2009 By Jonathan Ping 13 Comments
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I recently started reading The Undercover Economist by Tim Harford. So far, it’s a little like Freakonomics but a bit more economics and with slightly less controversial topics.

One interesting concept explained was price-targeting. Let’s say a coffee shop has to spend 50 cents to make a cup of coffee, including labor and materials but not rent. Now, each person walking by has a certain trigger price. If the coffee is cheaper than their personal trigger price, they buy, and if the coffee is more expensive, they don’t buy.

In a perfectly efficient market, a person would be honest about their trigger price, and a business could sell their coffee to anyone whose trigger price is above 50 cents. A frugal person might walk up and pay 75 cents, while a spendthrift coffee addict in a rush would pay $4 for the same cup. Obviously, this wouldn’t work in the real world, so stores have to find a way around this. Getting people to pay as close to their trigger price as possible is called price-targeting.

Instead, you have the current Starbucks menu = an entire wall of caffeinated options differing slightly by roast, size, flavoring, and preparation. When I need to get out of the house, I usually go in and get an iced coffee for about $2. They will add milk, or I can add it myself and you can get their syrup sweetener for free since sugar packets are hard to dissolve in cold drinks. Alternatively, a frappaccino is basically the same time but blended with some whipped cream for $3.50. So the “frugal” version is for the people looking to spend $2 on coffee, and the “premium” frapp is for those willing to spend over $3. The frapp probably cost around 10 cents more to make, while Starbucks made an additional $1 in profit.

A similar thing takes place in supermarkets, and is summarized well in this CFP Board newsletter article Taking Aim at Price Targeting:

Imagine you’re at the supermarket and want to buy a bag of chips. If you tend to be an impulse shopper, grabbing the first thing you see, you’ll likely end up with the most expensive chips available, conveniently placed at eye level by the supermarket’s thoughtful management. If you’re bargain conscious, however, a brief scan of the shelves will reveal cheaper chips tucked away closer to floor level. By offering similar products at different prices, the supermarket can make everybody happy: the impulse shopper gets her chips, the bargain hunter gets his bargain, and the supermarket maximizes profits from both types of customer. “In price targeting, customers pay what they are willing to pay,” Harford says. “It doesn’t depend on being a sucker. It’s even a good thing because if companies weren’t able to target, then nobody would get the lower prices.”

This is also why supermarkets have sales on a rotating range of products, instead of the same products or just lowering prices in general. The price-sensitive frugal folks will pretty much only buy what is on sale, and they’ll be drawn in and the store will make a little profit with slimmer margins. The people who never check what is on sale or are just buying ingredients required for a specific recipe will end up buying a lot of non-sale items which are marked up at a higher profit margin. Again, the store tries to get as close to a “perfect” market as possible.

The lesson? Be aware of price-targeting, be aware of your own tendencies, and look around to make sure you’re getting the best price when presented with a variety of options.

Filed Under: Book Reviews, Frugal Living
Last updated: April 25, 2019
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Budget Long-Term Travel: Explore Longer For Less

September 2, 2009 By Jonathan Ping 31 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

The following is a guest post from Matt from NomadicMatt, who as you might guess has a passion for travel and doesn’t like to stay in one place for too long. He wrote this while running around Spain! If you like what you see, I encourage you to check out his site for his travel blog and other travel tips.

One thing that always irks me about my fellow countrymen is the huge perception that travel is expensive. With only two weeks away a year, I can see why a lot of people would want to splash out on an expensive holiday. There’s nothing wrong with that. But a lot of people spend more money and get less value. They spend money on things the travel industry tells them they need but could find much cheaper. I’ve been traveling around the world for three years and whenever, I have friends come visit me in places, they are amazed at how little they spend compared to what they thought they would. I don’t penny pinch but I don’t spend money stupidly.

Take for example my trip to Thailand with a co-worker. Flights to Thailand can run anywhere between 800 and 1200 dollars for an economy class ticket. You can only hope to get on the lower end and sites like Momondo and Mobissimo are good at that. Additionally, you can check out my page on how to find cheap flights. My friend asked me how it would cost her for the two and half weeks we were going to be there. Should she bring 1,000 dollars? 1,500? Thinking about what I had planned for us, I told her $700 should be enough, unless she wanted to shop – then she should bring a few hundred more. She didn’t believe me but I was right. Here’s the break down:

  • Accommodation – Typical double bed room with shower, fan, or a/c. Nothing fancy but not super dirt, “I see a cockroach” cheap either. It cost us 20 dollars a night, which was split by two people.
  • Transportation – We took the local buses and trains around the country. They are very cheap with a train costing only a few hundred baht. (It’s 35 baht to one dollar). Overall, we spent $50 dollars on transport.
  • Food – Having lived in Thailand, I know the best food there is on the streets, which is also the cheapest food. A meal is about 30 baht. We also ate a lot of seafood on the islands which is about 300 baht a meal. Throw in a few sushi and Italian dinners at about 800 baht each and in total for 2 1/2 weeks we spent about 3,500 baht on food, which is $100 dollars.
  • Alcohol – We like to party so this was a bit of a budget buster. We easily spent $100 USD on going to clubs and beach parties.
  • Tours – We took one tour through the national park that cost us 1,500 baht for two days. The guides spoke perfect English and new things about the area that amazing. When we went to the beach, we did a snorkel tour for 500 baht.
  • Other sights – We spent about $10 dollars on the palace and temples in Bangkok.

So for 18 days we spent about $560 dollars per person, or about $31 a day, without skimping on anything, eating the local food, taking a few tours, and doing nothing really cheap. For 18 days, that is not a lot of money.

Thailand is a cheap country so I’m always amazed when people walk away spending lots of money. A typical two week tour to Thailand runs about $1,000 dollars from Gap Adventures, which actually specializes in inexpensive tours. We spent less in longer. (Editor’s note: Or you could stay an entire month for the same price of $1,000.)

Moreover, when most people travel to Thailand they stay at the big international hotels like the Marriott or the Sheraton, fly everywhere, and stay at luxury beach bungalows for 2,000 baht a night. When they eat, they eat out at fancy places. Relative to their home country, whether the U.S. or Europe, this may seem like a bargain (Wow! I just got a beach bungalow for 70 dollars a night!) but compared to how living locally is a third of the price, you aren’t getting good value for your money.

If luxury is what you want, go for it but if you want more value for your money, live more like a local, take the local transportation, and stay in middle of the road places. You’ll save a lot of money but also get to know the pulse of the location more. There’s nothing wrong with spending money but I find not getting the most out of the money you spend a waste.

(Photo credit: NomadicMatt)

Filed Under: Frugal Living, Travel
Last updated: January 10, 2013
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

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