Pricing Power

Readers, a brief consumer empowerment anecdote.

The last time I bought paper coffee filters, the store brand I usually buy came in packs of 200 for $2.00. Which is intriguing, because the time before when I bought them, a package contained 300. For $2.00.

This is of course a stealth price hike. A big one.

So what did I do? I still bought it. Contrary to my philosophy of brand disloyalty and my standard recommendation to punish all stealth price hikes by instantly dropping that product for a competitor, I still bought it.

The interesting question is why I still bought it, and what that implies to us as students of consumer behavior and consumer empowerment.

On one level, it's a low-ticket item, and one you hardly ever buy. You can easily argue what's the difference as you march to the checkout to pay 50% more. [1]

Then again, don't you think they know that? Isn't this playing out exactly the way they want it?

Yes, this is a low-ticket, infrequently-purchased staple item, one purchased so infrequently, in fact, that 90% of customers won't even remember the price or the unit volume from their last purchase. And because the store brand is already the lowest-cost product (and still is, barely, even after the price hike), there's no obvious alternative, at least not right there in the coffee aisle. Sure, there might be some possible competition outside your grocery store, but then you won't have the convenience of getting the item now, when you need it and while you're thinking about it. And heck, it's only two bucks.

Isn't that the perfect product for a price hike? Yes. Yes it is.

This, readers, is what they call "pricing power." In fact, it's near-perfect pricing power, and it's the holy grail for consumer products companies: the ability to raise prices with very little demand elasticity. Which is just a fancy way of saying people are going to make the same buying decision after the price hike as they did before.

Okay. How do we look at this from a standpoint of consumer (and investor) empowerment? How do we play chess here, rather than obediently, passively, making our pre-assigned checkers move? The conclusion isn't rocket science--in fact it's borderline transparently obvious--yet it's a conclusion that often eludes both investors and consumers:

Consumers: To the extent possible, avoid buying products with excellent pricing power. If your choices are limited, find substitutes, competing products, or an entirely alternative solution.

Investors: Invest in companies selling products with excellent pricing power.

And of course, the converse is true too: in general, try to buy products with terrible pricing power, and avoid investing in the companies making them.

That's the heuristic. That's the chess game we want to be playing. I'll leave it to you, readers, to come up with ways to apply it tactically to this specific problem.

[1] For math-challenged readers: 300 filters at $2.00 is a 0.66c cost per filter. 200 filters at $2.00 is a 1c cost per filter. 1c / 0.66c is an increase of 50%.

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