Got milk? Its influence is stronger than you think
Can the price of milk act as the de facto reference price used by consumers to determine the price competitiveness of an entire grocery store?
The answer is yes according to Tudor Bodea and Mark Ferguson, authors of Pricing Segmentation and Analytics. According to the authors;
Consumers are more aware of the “market” price of some items more than others. For grocery stores, an item that consumers frequently use is the price of a gallon of milk. Since most consumers buy milk every week, they tend to be very aware of its price. Thus if they enter a particular store for the first time and notice that the store prices a gallon of milk significantly higher that what they are used to paying (above their reference price), they will form an impression of the entire store as being a high-cost location. If, by comparison, the store prices an item such as nail clippers significantly higher than its competitors, consumers may not even notice this price difference since they buy nail clippers infrequently. For this reason, the price range for a gallon of milk is fairly small among competing stores; while the price range for items bought less frequently may exhibit a wide range of prices.
While the authors’ reference to nail clippers highlights the contrast in consumer awareness, it’s not what stores should be focusing on. The key to increasing revenues is to find those items that consumers purchase on a more frequent basis where reference prices have not been established. One easy area to focus on are items where size or weight is not uniform. A gallon of milk is a gallon of milk; the price comparison is quite easy. But other frequently bought items such as breakfast cereal come in so many different sizes that price comparisons are quite difficult. And these are the items where stores should be realizing higher than normal margins.