Sunday, April 24, 2011

False Quantity Discounts and Chocolate Bunnies

Almost two years ago I wrote an article about drugstores offering false quantity discounts. By false quantity discount, I mean that if the price tag said "10 for $10" you didn't need to buy a quantity of 10 to get the discount. You could buy one for one dollar, two for two dollars, eight for eight dollars or any variation thereof. This dishonest and lazy policy struck me as harmful, not so much to customers, but to the retailers' revenues. Under a system of false quantity discounts, assuming customers believe what the price tags say (though I'm sure many are savvy to the policy by now), if a customer chooses to buy fewer than the (false) required quantity, the retailer needlessly loses money on the transaction. These customers are willing to buy the item, but unwilling to buy it in such a quantity that, they think, would earn them a discount. But when they get to the cash register, CHA CHING! they get the discount anyway. These surprise discounts reduce revenue. And the retailers who have their Point of Sale systems set up like this are leaving money on the table. To illustrate the foolishness of such a policy I'll tell you about my shopping expedition to a Rite-Aid the other day. At Rite-Aid there was a sale on chocolate bunnies. "2 for $3" it said:
Knowing there was a chance that this Rite-Aid didn't have a POS system sophisticated enough to handle a real quantity discount, and hungry for a bunny, I bought just one item. And just as I had guessed, this wasn't a real quantity discount, just a re-setting of the price to $1.50 per unit. Here's the proof:

(Disregard that I was also buying earplugs and a glasses case that, as it turns out is not intended for my gender. Chocolate bunny is line three.)
As you can see, not only was it unneccessary for me to buy two rabbits to get the discount, but I also got that one rabbit cheaper than advertised. This begs the question: why would a retailer ever sell something for cheaper than advertised? I've heard of bait and switch, but this is like bait and switch in the customer's favor. The only reason for a policy such as this must be that some retailers choose not incur the costs of implementing and maintaining more detailed POS system that can handle a quantity discount. Not knowing what the costs are, I can't judge whether this is the right or wrong choice. All I know is that such a policy lowers revenue.

So yes, my savvy shopping prevented me from buying an extra chocolate bunny I didn't really need, just to get a discount I would have received anyway. But this article is not about me. This is about the customers who go to Rite-Aid thinking they would need to buy two bunnies to get the discount, choose to buy just one bunny instead, and then get the discount anyway. These customers are willing to give up more of their money, but the retailers who follow this lazy policy are choosing not to take it. What's up with that? I've seen a few drugstores and grocery stores who have POS systems that implement real quantity discounts. I'm sure in the long run this will help them to do better than companies taking the dishonest and lazy path. Dishonest and hardworking? That can work. But dishonest and lazy is not a recipe for success.

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