## What happens to the sweater from 6AM to 9AM for the price to double?

Sometime during many of the obligatory Thanks Giving conversations, an elderly relative loudly wondered about the mysteries of Black Friday pricing.

The sweater costs  \$29.99 at 6AM but  if I buy the same sweater at 9AM it is \$59.99. I mean, come on. It is the same sweater! What happens to the sweater  from 6AM to 9AM that makes it double in price.

She likely was just making a conversation. Or a philosophical observation expecting others to simply marvel at her astute comment that everyone else seem to have missed.

The answer is boring (I still have not mastered any party tricks on pricing to entertain people).

Let us limit the answer to the specific question and not mix it with loss-leader pricing.

Simple answer, nothing happens to the sweater. Yes, it is the same sweater. It is the mix of people (customer mix) that changes from 6AM to 9AM (or later).

As customers we all have different prices we think is fair to pay for the sweater. Here, by fair I mean the price that we willingly pay without feeling pain.  Let me use a very simple example with hard restrictions to explain why the price doubles from 6AM to 9AM.

Let us say there are only 100 people, numbered from 1 to 100. Each person is willing to pay a price that is less than and up to their number ( person numbered 10 willing to pay up to \$10 etc).   Even if it is a penny less, they will buy the sweater at the price.

Let us also assume the sweater costs the store \$9.99 to buy.

If the sweater is priced \$59.99 all the time, all those numbered from 60 to 100 will buy it, netting a profit of \$2050 for the store.

If the sweater is priced \$29.99 all the time, all those numbered from 30 to 100 will buy it, netting a profit of \$1420 for the store. Note that all those numbered  60 and above will still buy it at this low price (the difference between their number and the price they pay is heir consumer surplus).

(Higher price netting higher profit is just an artifact of choosing these numbers, and not because higher prices drive higher profits)

But what if the store can sell the sweater a \$29.99 only to those numbered between 30 and 59 and sell  it at \$59.99 to those numbered 60 to 100? They would make a total profit of \$2650. (If one price is good, two seem to be better.)

The problem is these 100 people don’t show their numbers to the store and even if they did the store cannot force them to pay based on their number.

But what if there is a way to separate most of those of those in the 30 to 59 range from those in the 60 to 100 range? Conversely what if there is a way to keep most of those in the 60 to 100 range to pass on the  \$29.99 deal?

One such way is changing the buying experience. Create enough pain in the buying experience , like asking them to skip sleep, wake up early and schlep to the store at 6AM, such that most (if not all) in the 60 to 100 range will find it not worth it, just for getting additional consumer surplus. That is why there is a 6AM deal.

Most in the 30 to 59 range will likely do that sacrifice to score the sweater at lower price.

It is not ideal. Not all numbered 30 to 59 will come at 6AM and some from 60 to 100 may sacrifice sleep and family time to come at 6AM. As long as there are at least 5 people numbered between 30 and 59 come at 6AM for every 2 people in the 60 to 100 range, the store will do fine.

So there you have it. That is  a simplified definition of price discrimination, customer willingness to pay and price versioning.

Try explaining this to your elderly relative.