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.

Using Metrics Over Myths in Hiring

For the first time in my life I filled out the March Madness bracket. I never followed NCAA Basketball nor do I plan on following now. I did it only because of the simple idea from The Wall Street Journal to do Blindfold Brackets.

In WSJ’s Blindfold Bracket they stripped down names of the teams and substituted them with made up names. For each game they present the two teams with their made up names but their real statistics. Based only on the metrics and stripped of any affiliation or bias to actual teams you need to pick the winner.

I do not know all the teams that are playing this year.  Bias would not have been an issue for me but without the metrics presented I would have been clueless. So I filled out my first bracket. I used the following simple rule and applied it consistently for all the match-ups I was presented.

  1. I treated all the metrics as linear  interval scale from 1 to 5.
  2. I ignored the metric on Hot streak. It didn’t matter (teams will regress to the mean)
  3. Offense and Defense are my first criteria. Both got equal weight with an exception.  When a team with better offense faced a team with better defense I picked the defensive time unless Offense is 2 points better than opposing team’s defense.
  4. If both Offense and Defense are equally balanced I picked based on experience.
  5. I mostly ignored 3-point shooting because I did not bother to check prevalence of 3-point shooting in NCAA.

You can see my bracket here. On the first big day, the WSJ standings say I picked 16 of the first 20 games correctly. Let us see if I will regress to the mean.

The point is how relevant this simple example is to how we hire a candidate, choose our gurus or fund a venture. In his book, “Thinking, Fast and Slow“, Nobel laureate and Behavioral Economist, Daniel Kahneman writes how easily we succumb to irrelevant attributes in hiring people.

We rely on looks (the candidate looks the part), how she talks, etc. We invent subjective metrics like, “hustle”. We focus on most recent success or failure and ignore the history.  We hire based on interviewing skills over wherewithal to get the job done. We let the first impression and answer to the first question bias the rest of the interview process. Once we form an opinion we keep digging for selective evidence to support our case.

Kahneman recommends a metrics driven approach to hiring.

  1. Come with a set of metrics you are going to evaluate all candidates on. You will apply the same metrics and same scale to all.
  2. Treat the different metrics as additive. If you want use weighted scale but use it consistently.
  3. Make an upfront commitment that you will hire only the candidate with highest total score regardless of the intangibles and your gut feel.
  4. Design a list of questions and ways you will measure the candidates on these metrics. Score each candidate on these metrics.
  5. If you insist on image and look, define its own metric but make sure it does not contribute  more than 10% of the total.

This may not work all the time but is likely to work most of the time and you have a reproducible process compared to the one based on your gut, driven by irrelevant factors and subject to your cognitive biases.

Are you prepared to hire based on falsifiable but repeatable metrics over axiomatic myths?

And by the way, it appears my choice for NCAA championship is Kansas. Same as the most common choice of others playing Blindfold Bracket.