Monday, April 20, 2009

Secret of the 99 Cents Only Store

How much does stuff cost at the 99 Cents Only Store? It sounds like asking who's buried in Grant's Tomb. Oh, sure, inflation is constantly assailing the business model. The 99 Cents Only chain dates to 1982. What was 99 cents then would be worth over $2 now. In 2008 the company it bit the bullet and raised its top price to $99.99. For President Jeff Gold, it was almost like a death in the family. "The number 99 is a magic number — deviating from that is something we absolutely are not taking lightly," Gold was quoted. "I find significant discomfort emotionally about considering making the change."
Nevertheless, the vast majority of items the store sells still do cost under a dollar — but perhaps not so much under a dollar as you might think. This recent sales receipt shows that the items are priced, not at 99 cents but at $0.9999. That's four significant digits to the right of the decimal point. (Picture the meeting where this was floated. "Jeff, I thought it was crazy, too, then I asked myself: why leave money on the table?" Was there a debate over how many 9's were seemly? Would $0.99999999 be pushing it?)

As far as I can tell, those two extra 9s are an unadvertised special. The store has not changed its signage to read 99.99 Cents Only. (I guess it's like Motel 6, which originally charged $6 for a room but retains the original name.) It's not clear from the above how the store accomplishes the rounding. In this case, the buyer paid a de facto price of $1.00 for the $0.9999 items. Suppose someone bought a hundred such items. Would she be charged $99.99 plus tax? Or does the register immediately round every $0.9999 to $1.00?

Pricing the Cable TV Banquet

When McDonald's raises the price of hamburgers, it can usually point to increased costs for beef, buns, and ketchup. Cable TV companies are different: Though their rates have gone up (more than hamburgers have), their costs have mostly gone down. In Saul Hansel's New York Times piece on this topic, the metaphor du jour is food:

“When you go to lunch with a friend, do you split the bill in half if he gets the steak and you have a salad?” Landel C. Hobbs, the chief operating officer of Time Warner Cable, asked recently in a blog post…

Still, critics say the image of Internet providers as restaurants about to go broke serving an endless line of gluttons simply does not match the financial or technological realities of the industry.… Cable or telephone networks have little in common with a restaurant, the critics say, because there is no electronic equivalent of food to buy. If all Time Warner customers decided one day not to check their e-mail or download a single movie, the company’s costs would be no different than on a day when every customer was glued to the screen watching one YouTube video after another.

Monday, April 6, 2009

Information Wants to Be Free (or Reasonable?)

At the New York Times, Matt Richtel and Bob Tedeschi take on the puzzle, how come phone companies can charge for digital content and no one else can?

At its annual trade show in Las Vegas last week, the phone industry pushed new software stores, video players, games and content. Their efforts are based on a digital twist on Pavlov: The phone rings and we pay.

“There’s been no expectation that anything would be free,” said David Chamberlain, an analyst with In-Stat, a market research firm. “The telcos have been very careful not to give stuff away.”

By contrast, he said, “a lot of people on the Internet are wondering — why did we let all this stuff go for free?”

Friday, April 3, 2009

Mr. Whipple Was Wrong

The worst marketing pitch of all time? It might be "Please don't squeeze the Charmin!" suggests Time magazine's Sean Gregory. He's writing about an upcoming study of the instant endowment effect, to be published in the Journal of Consumer Research. In the endowment effect (a term coined by Richard Thaler in the 1980s), people place a higher value on things they own than on things they don't own. A familiar example is the elderly couple selling the family home, "full of memories." They place an unrealistically high price on it and can't understand why no buyer is interested. There is at least an emotional logic to that. Much stranger is the "instant endowment effect" in which merely touching something raises people's stated prices. Most economics students experience the classroom demonstration of this effect: Coffee mugs from the campus store are distributed randomly to half the students. The people with mugs are encouraged to bargain with the have-nots and sell their mug at a mutually agreeable price. You might expect (and economic theory predicts) that half the mugs would be sold. That is, half the owners would find a buyer who happened to value the mug more than they did. After all, the mugs were passed out randomly, without any regard to who actually wanted a mug and who could have used some easy cash. But the experiment's usual result is that few mugs sell. The people who have the mugs find that no buyer is willing to pay what they think they're worth.
The instant endowment effect has always had an air of mystery. Day after day, a bag of beef jerky sits at the elbow of the guy at the 7-11. He’s spent more time in proximity to that dried meat snack than he has with his latest girlfriend. Does the instant endowment effect cast its spell on that checker, causing him to demand an inflated price to part with a humble sodium-laden treat? Surely not. Daniel Kahneman proposed that, when you're in the business of selling something, you become immune to endowment effects. Beef jerky does not register as "mine" when it's part of a stock in trade. This plausible hypothesis raises as many questions as it answers. There has been much debate over how, and whether, instant endowment effects apply in marketing.
In the new study, by the University of Wisconsin's Joann Peck and UCLA's Suzanne Shu, coffee mugs and Slinkys were set in front of 241 Wisconsin undergraduates. Half the students were allowed to touch the items; the other half could only look at them (as window shoppers, more or less). The students who touched the products were willing to pay more for them than the window-shoppers. This augments the growing case that instant endowment effects are robust and would apply in the real world. Indeed, Peck and Shu cite the Apple Store as a good application. For fanboy looky-loos, touching is buying.
(Time's Sean Gregory may be a little hard on Mr. Whipple. I imagine Procter & Gamble was counting on reverse psychology. Telling shoppers not to fondle the toilet paper made them do so — in the commercials, and probably in real life).