Variable pricing is a bad idea (or How your store might become a giant produce section)

The New York Times recently wrote about variable price shopping: the idea that some grocery stores are starting to think about changing the price of items depending on your individual purchase patterns.  And this is a spectacularly bad idea.

I’ve spoken in the media about the psychological consequences of dynamic pricing before, particularly in relation to Groupon and other deal sites.  The basic argument from stores is this: pricing in capitalism is built on a demand curve – the more you want it, the more you will pay – so by moving from understand the demands of the groups to the demands of the individual will allow for a closer fit to the true underlying demand.  It is a perfectly rational economic argument, and one that was used with Groupon: if your current demand is low, make it cheaper so that people sample your product, which increases their demand, which allows you to charge them the non-discounted price next time.

The problem is that it is a spectacularly bad psychological argument (which is why economists created behavioral economics in the first place).  Our willingness to pay for something depends not just on our absolute need for it, but also our understanding of it in a complex web of other prices and other motivations, including powerful anchors.  Which many merchant services using Groupon’s found out: giving people something at a discounted price made them anchor their demand on that price and made it “not worth it” at a higher, non-discounted price.

The grocery plan suffers from this problem: you don’t gain nearly as many new loyal customers for an item by making it temporarily cheaper, especially if every other item in your category is also doing the same thing.  Indeed, let’s imagine that this became highly successful.  I don’t normally drink bottled water but I have bought Brand A juice, so Brand A offers it to me cheap ($1) to see if they can get me to buy it more regularly at a higher price ($1.50).

So I buy a case of discounted water from Brand A at $1.  Now Brand B, seeing that I’m a water buyer, offers me a discounted case at $1 to get me to switch to Brand B.  Brand A has gone back up to regular price ($1.50) and my setpoint for water is now $1, so I buy Brand B.  Which Brand C notices and…you get the idea.

But why isn’t this good for the consumer?  After all, I now get water for a constantly discounted price, if I play the game correctly.  And that’s the problem: I have to play the game.

The most volatile current pricing in a grocery store centers around produce and it is one of the things that people hate shopping for the most.  Indeed, stores sell much larger quantities of more stable-priced produce (like apples) than volatile-priced produce (like peaches) because of simple expectations.  I can go to the store and buy an apple with very few psychological ramifications: apples are mostly always the same price, I don’t feel like I’m getting swindled by my desire for it when out of season, and so I have very little regret.  But beware of falling in love with berries, which fluctuate wildly in price depending on season.  I’m happy, very happy, when they happen to be particularly cheap but otherwise tend to ignore them, because I fixate on the higher price: seasonal goods, in essence, have become premium goods.

So now apply that model to everything in the store.  If everything I love becomes more expensive the more I love it, suddenly I’m playing a vast and constantly shifting game of regret balancing.  I really want the cereal, but because I have bought it before and not this other cereal, the other cereal is now “discounted” to a significantly lower price and I constantly have to be making the tradeoff calculations of my want against this new and shifting price.  And what’s more, I know if I don’t buy the cereal I actually like for awhile, they’ll offer me a lower price at some point, so I should resist my urge to buy it now so that it comes down in price.

It doesn’t take a psychologist to figure out that is not a world anyone wants to live in.  Stability is a human component of human happiness, and while the occasional seasonal fruit might make me enjoy a particular day, the world is mostly powered by apples: price stable, quality stable, and thus the staple of the lunch bag.


Also published on Medium.