h1

Segmentation, supermarket strategy, and being a cheap bastard

October 24, 2008

Do you have a supermarket strategy? We do.

Before I go on, I want to talk about market segmentation by price.

This kind of segmentation is one way that companies try to maximise their profits. Here’s how it works.

Imagine that we sell eggs. They cost us $3 per dozen wholesale.

We’ve figured out that we get the most profit by selling eggs at $5 per dozen.

At $6 per dozen enough people are put off that even though we make more per egg, our total profit is lower.

At $4 per dozen, the decreased margin means we don’t make as much money per egg.

$5 per dozen it is then. Most people will buy at that price. Those people are normal.

But wait. We know that there are some people who would pay $6 per dozen. The hungry, the tired, the careless, and the people who are bad at maths. It would be neat to identify them and give them a separate price, and pocket the extra $1 per dozen. If only we could cull them out from the herd so they don’t perceive the deal that others see. Hmmm. Let’s sell them premium branded eggs in delightful bijou boxes and capture the increased margin! Let’s put those eggs in a colourful display with maximum visual impact at eye level! Let’s call those people… suckers.

There are other people who are going to hold out, and not buy until we hit $4 per dozen. If we could find a way to offer them that price without tipping off the others in the market, we could sell even more eggs, and still make at least something on them. We’ll have to make it off-putting so that only the hold-outs take advantage. Unwieldy poo-tinted boxes at floor level it is. Those hold-outs? They are cheap bastards.

You can see this pattern a lot. There are only two supermarket companies of note in New Zealand, but they have multiple supermarket chains between them, with different images, branding and pricing to attract those different segments of the market. Within each supermarket, most product categories have different lines that are equivalent in quality but marketed differently so that the normal people buy the obvious choice, the suckers are fleeced, and the cheap bastards have something to reward their effort.

Our mission as cheap bastards is to accept the challenge marketers set us. Treat it like a game with a prize. They want to confuse us or at least make us work for the best deal. That’s why they put the items they want to sell the most at eye level, that’s why the essential toilet paper is right across the from the non-essential chocolate, that’s why the bulk package is inexplicably more expensive per kilo than the small one.

We accept that challenge. This is how we play the game.

(I got the idea for this part of the post from Joel Spolsky, who wrote a neat article about segmentation in a rather different kind of market).

Have a list

In our house, we have a template that we print off with all our usual items on it. We cross off the things we don’t need before we set out. That way we don’t forget anything. If an item gets added by hand a few weeks running, it goes on the template.

Work out the unit price on everything

We always do this when comparing different brands of packaged goods, going so far as to check ingredient lists on food packets to ensure there’s no cheap filler. We have good mental arithmetic, but there is no shame in using a calculator. (Doesn’t your expensive mobile phone have a calculator?)

Stockpile

Buy in bulk to stockpile if:

  • It is something you usually buy.
  • The expiry dates show that you can consume it all while it is still good.
  • You can store it somewhere where it won’t go off.
  • The discount is more than you would obtain by investing the money over the period it would take to consume (eg, if you could save 5% off a year’s supply of toilet paper, but could get 6% in the bank, you would be better off putting the money in the bank and paying the normal price for toilet paper).

Example: our local supermarket was selling peanut butter, the brand we like that’s still not made in China, at about 40% off a couple of months ago, expiry date middle of next year. We bought four jars. We’ve just finished the last one, and I regret not having got a dozen.

Avoid temptation

Don’t use a basket if you can carry all the items; don’t use a trolley if they’ll fit in a basket.

There is no reason to go through aisles that don’t have something on your list.

Never take things from tempting display until you’ve checked the usual shelf for cheaper options.

Eat before you go lest your hunger makes you buy something stupid.

So, what did I miss?

Advertisements

15 comments

  1. You’re right about not shopping on an empty stomach. Some other things to note:

    * don’t take your children with you (if you have any)
    * Dads and their children are the worst combination for impulse buying
    * as you say, don’t go down an aisle you don’t need to because mostly, the good, nice, healthy things are located around the outskirts of the store anyhow (note: think about where the milk and bread are, right at the far end)

    Oh, and remember your re-usable bags. There’s no point getting throwaway carrier bags – plus, this acts as a deterrent for impulse purchases. It makes you think twice about putting another item in your basket if it won’t fit in your bags without having to get an extra plastic bag.

    Finally, I need to stockpile certain items just like you. I did this with cat food last month (two tins for $1) but I need to do more of it.


  2. Great post! And as I try to live frugally, I can’t read posts like this enough times. I’d like to add a few additional things:

    * Cut up your own fruit & veggies. BIG price difference between the pre-cut packaged and the whole variety.
    * Buy meat on sale and freeze it. I try to buy ground turkey, make & bag burgers in ziplock bags, then put them in the freezer. I do this with pork chops as well, then just take one out to cook as needed. (A single person tip!)
    * Coupons! I go down my list and check online for any coupons I can find for any of the items. I have been finding some good $1 off coupons lately. Those really add up!


  3. Where do you find ground turkey?! Or unground turkey, for that matter. It’s one of my favourite meats and I don’t seem to find it in NZ except at Christmas.


  4. Giovanni, I’m thinking that comment came from an American, judging by the references to ziplock bags and coupons. (And on review, the North American IP number).


  5. i thought that too. but, meh, a comment is a comment, even from an astroturfer.

    stephen, when we gonna start making advertising money of this turkey?


  6. stephen, when we gonna start making advertising money of this turkey?

    Again with the turkey… you’re making me hungry.

    i thought that too. but, meh, a comment is a comment, even from an astroturfer.

    Well, they do have a lot to teach us about frugality. There was a forum/site I frequented for a bit, I’m buggered if I can remember what it was called… skinflintes? cheapskates? Ah, I forget.


  7. stephen, when we gonna start making advertising money of this turkey?

    When you make 50% of the posts, mate 😉

    I don’t think that was an astroturf comment though. There was no link, no self-promo, no nothing. Let’s not bust out the pitchforks and the torches until there’s a little more evidence.


  8. “chic financials”.

    and i think i should recoup half the costs when i make have the posts. i’m happy to go pro rata till then.


  9. “chic financials”

    Somebody with a blog on the same topic as yours. You wouldn’t want to attract that riff-raff, now, would you?!


  10. i assumed it was a finance company. now, *thats* the damn riff-raff.


  11. It’s a nice blog, incidentally, and she’s blogrolled you guys.


  12. in this case, my apologies to chic.


  13. On the segmentation thing: I might have already mentioned how I personally find the budget tomatoes superior to any of the more expensive brands I’ve tried. I’ll add to that for the purposes of making pizza the Valumetric shredded mozzarella is great and far, far superior to the other brands, which are about twice as expensive on average (if you can get tge 500g valumetric bag, which is sometimes tricky to find – PaknSave tends to have it.)


  14. I generally agree with your post, except for the “Don’t go down aisles without stuff you need”. If you don’t go down each aisle, then you can’t see what things are on special. Things that are in your everyday useage, of course. If you buy it on the week that you don’t need it, but it is on sepcial, then you don’t need to buy it the week you do need it and it is not on special.

    The other thing to consider about stockpiling is willpower. In our household we are quite used to the concept of stockpiling, and so generally have for example, a couple of dozen beer (bought on special) sitting in the bottom of the pantry, and a shelf of chocolate biscuits (bought on special).

    And we don’t see them and think “must consume” every time we open the pantry door. Which apparently some people just can’t do, and end up eating a whole packet of biscuits watching TV one night. I think it could be about out lifestyle, eating habits, and willpower.

    But it does mean when we do want to take a packet of biscuits out when visiting friends, then we can just grab something off the shelf rather than stop at the (gasp) dairy or petrol station on the way.


  15. […] This is an article about supermarket playing with prices to get consumers buy more of discounted or promoted products. They might actually just “engineer” some things to make us confused and regard the price as advantageous. It suggests that we should look at the price carefully, count the value of the product, and compare with the original price. There are examples and explanations of how supermarkets are doing this and how easily we get persuaded. There are patterns. Be aware of promotion that includes bulk products and product that sold with a “bonus” package. It is really important to count the price of everything you’ll accept. Also watch for expired dates and don’t be tempted. Read the article for details of what you might never realized. There are also some useful tips. Read here. […]



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: