Irrational response to prices


As I was bombarded with yet another sales manager grumbling about prices being too high (we are the market leader, and if we lower our price, all our competitors will match), it dawned on me that prices bring out irrational behavior.

A classic example is gasoline prices.  As the cost per gallon rises, you hear a lot of grumbling, and people will do irrational things to respond, including:

1) Trade in an SUV at a ruinous tradein value for a Prius and pay $2K or more over sticker for the prius.  If you run the numbers, you realize that you will NEVER save enough on gas to trade in a serviceable vehicle for a new one, and pay over sticker to boot.

2) Drive all over town to save a penny or two per gallon.  Seriously, even if you have a 25 gallon tank like I did in my old truck, that is a $0.50 in saving.  If you burn a quarter gallon of gas (driving 5 miles in my truck) to save that much, you barely break even.

3) Shop at Arco.  This is the worst of them all.  They are typically a penny or two lower than the nearby neighbor.  But they attract a clientelle that will drive out of their way (see #2 above) and will wait in line several cars worth to buy gas.  Furthermore, they invariably have one pay station that is the most user unfriendly to use (you again wait in line, and have to navigate several steps to pay for gas).  It clearly is a lose, lose, lose situation, but their shoppers are convinced that they are getting a good deal.

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By geoffand


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May 2011

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