The Incredible Starbucks Steel Gift Card

To refresh your memory, just before the holidays Starbucks launched a limited edition (5000 only) steel gift card priced at $450. The card carries a value of $400 and comes with some sundry benefits like free refill on brewed coffee and free drink on birthday.

That is correct. It costs you $450 to get $400 because Starbucks said it costs them a lot to make this steel card. While I called this egregious pricing, at least 5000 people did not think so. The card was sold out and worse was sold for much higher prices on eBay.

By last check there were 510 sold listings.

  • 70 odd listings were for just the empty card ($0 value) sold from $325 to $650
  • Most of the listings were with the full $400 value and sold from  $670 to $1250
  • Very few listings with $5 and $25 value and with no other values

What can I say about this?

Pricing on $0 gift card provides great insight on buyer perception. It appears keeping the full $400 value of the card helped increase its value among buyers. That is, when sellers left $400 on the card buyers bid additional $600 for that $400.

We can try to explain away why anyone would pay $650 for an empty card. But nothing in rational economics can explain why someone will bid $1.5 for each additional $1.

But I think the only reasonable point we can make from this data is – the left tail of human civilization has at least 5000 people, the left most has at least 510 people (those who won the auctions) and rightmost has 510 people, those who made a profit.  (Note: Subtract the 510, those who sold, from 5000 and add back those bought and you get 5000 in left tail.)

And you my friend, I know, is in the right tail, simply because you are reading this.

What are you willing to accept for your $20 @Target gift card?

Say you are in possession of a $20 Target gift card. It is likely someone gave this as a gift to you as it is farfetched that one would buy oneself a gift card.

I offer to take that gift card from your hand for cold hard cash – cash that is lot more flexible than the Target gift card which has the limitation that it can only be spent at Target.

As a Homo Economicus you should be willing to accept any reasonable offer that is just about less than $20

As you can see Eric above was willing to accept even $19. There is likely a distribution of offers. But if  offered  exactly $20 in cash in exchange for the gift card of same value anyone should willingly accept the offer. In fact the added benefit of complete flexibility is the consumer surplus that makes this a high value transaction.

However there exist a set of people who would firmly hold on to the gift card despite an even offer.

I polled a non-scientific sample of 15  third graders on this even transfer -

You got a $20 Target gift card for your birthday. Would you trade that with me for $20 bill?

The answer from all was a resounding no.

The reason? If I have the gift card then I know I have to spend it and I can only spend it. No doubts and no pain. But if I have that as $20 bill then another option opens up. I could save some of it another day. And I don’t want that painful choice.

Cash adds more choices – the money can be spent on other utilitarian needs or even saved. Keeping it as gift card seem to provide the justification that they have to spend it all with no other option. So the easy way to avoid the hedonistic conflict is to reject the offer to exchange gift card (hedonistic) for $20 bill (utilitarian). (See here)

 

 

Deliberate Pricing or Math Ignorance?

What do you think? Is this a case of

  1. Asymmetrically Dominated  Option (Decoy pricing) to make it attractive to buy the middle option?
  2. Effective non-linear pricing to capture more value from those who want 3 baskets (like what we saw with hair-braiding case here)
  3. Deliberate mis-pricing to capitalize on those customers not so good at math?
  4. Deliberate pricing (with the separation of price postings) to capture consumer surplus?
  5. Math error by vendors compounded by customers’ reluctance to do the math?

 

4 Ways You Can Put Google Customer Surveys To Work Today

As I previously wrote, Google Customer Surveys is a true business model innovation. It helps publishers unlock value from their digital assets and enables market researchers reach new audience they otherwise would not have found. I expressed my reservations on their positioning in my previous article

But I do not get what they mean by, “look for correlations between questions” and definitely don’t get, “pull out hypotheses”. It is us, the decision makers,who make the hypothesis in the hypothesis testing. We are paid to make better hypotheses that are worthy of testing.

Since I wrote that article, their Product Manager emailed to say they removed their statement on, “pull out hypothesis”.

This is a limited tool with ability to ask just one question and no way to ensure that the same user will answer multiple questions for doing customer level analysis.

There is one more item which is their minimum sample size. You cannot order anything less than 1000 samples.

Despite these reservations I see Google Customer Surveys as an effective tool for product/brand managers, researchers and small businesses for these purposes:

1. Aided Recall:  Present them a choice of different brands ask them how many of these they recognize.
When you are trying to get very quick and high level data on customer awareness or preference of your brand, this is a great tool. The results are especially actionable when you get extreme results like no one knows about you.
If you are trying to find which brand they recognize the most then you can do that as well with different question type. However, due to its question format limitation, Google Customer Surveys cannot help with Unaided recall.

2. Finding Consideration Set: Present them a choice of different brands and ask them how many will they consider buying for solving a particular need. This is similar to Aided Recall but the question is more focused. You are not simply asking about awareness but whether your brand makes it into their consideration set.

3. Brand Association: Present them an image or a statement and ask them to pick a tag-line or brand they believe goes with it. Another variation of this question is asking them to associate your brand with an unrelated field. A typical example is, “if our brand were a movie actor, who will it be”.

Ability to use images is a very powerful feature. It creates many different opportunities. For example for testing your advertising copy or the images you use in your collateral. It is better to poll your audience whether the image you used looks more like a bean bag or boxing glove before you launch your expensive advertising campaign.

4. Consumer Behavior Research: This is a whole class of hypothesis testing you can do with Google Customer Surveys. While it is not a tool for A/B split testing, you can use it test your hypothesis on customer preferences or their susceptibility to anchors and other nudges. Before collecting results you need to specify a reasonable hypothesis that is worth testing. When you collect data you can test for statistical significance using Chi-square test to validate your hypothesis. Do keep in mind that sometimes data can fit more than one hypotheses

There is however a big limitation because of the length of questions you can ask (as you see in the third option in the image on the left).

There you have it. A tool with limitations but is effective for specific areas. It opens up new ways to collect data and test when none existed before.

A corollary for this post would be cases where you should not use this tool. That includes finding price customers are willing to pay or asking them about how important a single feature is. You have to wait for another post for the reasons.

Answer to Pricing Puzzle – Pricing Lactaid Milk at Trader Joe’s and Target

This will be a nice reference price question to test for behavioral economists like the beer on the beach question by Daniel Kahneman. My hypothesis, you will find either no difference or higher price quoted for Target.

Run a split test with,

I am going to Target to get some stuff. I will get your Lactaid milk there. How much are you willing to pay?

OR

I am going to Trader Joe’s to get some stuff. I will get your Lactaid milk there. How much are you willing to pay?

But I digress.

For those who are not aware, Lactaid is the brand of lactose reduced milk ( reduced using lactase enzyme). It is generally priced twice at much as regular milk. Instead of buying Lactaid, one could buy regular milk and lactase and mix it themselves. But what Lactaid offers is convenience and for the limited segment that wants milk despite their intolrenance and values convenience. So a higher price makes sense.

Lactaid is a national CPG brand, available in most stores. So why is it priced higher at Trader Joe’s?

Another argument is cost based. Target, a bigger retailer, has pricing power with suppliers. Since it can negotiate a lower price it can charge lower price to its customers. True but the cause and effect are reversed. Target wants to serve lot more customers that have lower willingness to pay. Once they decided the price they work with suppliers to bring the cost down. Not the other way. Think about prices of other products (granted not same brand). Does the cost argument holds?

One line of argument is, it is not just the product, it is the store experience. The price of store experience is built into the milk. Partly true. Then you must run the behavioral experiment I stated in the beginning.

The answer, as in most pricing cases, starts with the customer.

A Trader Joe’s customer goes there for different reasons than they go to Target (likely same customers but they hire the stores for different reasons). They go to Trader Joe’s for its unique product mix, experience etc. but definitely not for getting Lactaid milk.  If I remember correctly that is the only major CPG brand I have seen at Trader Joe’s. Most of the product mix is  made of store brands or smaller regional brands.

Those customers seeking to buy Lactaid at Trader Joe’s is looking for convenience. They are at the milk aisle for the rest of the family and want to complete their milk shopping list by avoiding one more trip to another store or its milk aisle.

There are likely not many such customers (most  likely TJ’s customers are Target customers as well). So for that limited segment that values convenience and needs a specific product, the willingness to pay is higher.

Since they can charge this higher price they are likely willing to pay higher price to suppliers to stock the milk in their shelves.

No customers. No products.

Price always comes first then costs. And for pricing, customers and their needs come first, then everything else.

Explaining why it costs even more at Whole Foods is left as an exercise to the reader.

Answer to Pricing Puzzle – Why do children’s museums charge lower price for children?

First note that the marginal cost for the museum to allow one more child (or a family) is $0. That is irrelevant to pricing regardless of what some guru says about future of pricing.

This is a case of metered price discrimination combined with partitioned pricing. Do not look at this as two separate price points for parent and children. This is just one total price. The museums want to charge a fixed price per family. If you assume a simple case of  one parent per child combination, the museums want them to pay one total price for their entry.

Some parents may find the total price too high and may not use the museum but others will.

Once they decided the total price for parent-child pair it becomes a question of how to partition it between parent and child.

  1. They could simply not partition, setting one price for the pair. That would result in the customer (the parent) assigning all the price to just one and see value mismatch. Research on combined vs. partitioned pricing suggest the single price will not be received well with the customers.
  2. Charge all the price to parent or child and call the other one as free. This has the same effect as previous case.
  3. They could share the total price evenly and set same price for both adult and child. But that goes against the reference price in the minds of the customers on priced they pay for children. Same reason they cannot assign higher share to the child.

Hence we have the case we see everywhere despite value delivered to the customer, parents tickets are priced higher than the that of children’s.

A case of partitioned pricing.