Higher Prices for More Beer

20161011_203931

Here is an interesting situation found by a reader of Pragmatic Pricing.

Hi Mark,

While travelling to Memphis earlier this week for business, I had dinner one evening at BB King’s Blues Club and stumbled upon an interested pricing example.

Typically, everyone expects a volume discount, especially at restaurants – “super-size” it and get the large size for just a little bit more – as we all have been conditioned.  It would appear that BB King’s is taking advantage of that conditioning.  I almost ordered the 20 oz. draft beer, but while waiting for a waitress to show up and take my order, I had time to look at the pricing more closely and realized that they were actually charging a premium to get a larger size.  The additional 4 oz. cost $2.00 more or $0.50 per ounce regardless of whether you were ordering a domestic or premium beer.  Clearly the first 16 oz. weren’t priced at that level with domestic costing $0.36 per ounce and premium costing $0.42 per ounce.  The net effect is that the pricing on the 20 oz. beer is 7.8% higher for the domestic and 3.7% higher for the premium compared to the 16 oz. options.

When multiplied times the number of beers they serve in a typical evening, I would imagine that this results in a decent increase in margin on draft beer.  They certainly aren’t singing the blues!

Ken

Thanks for a great observation, Ken. BB King’s has found a rule of thumb that customers just tend to believe is true and is taking advantage of it. I’m certainly guilty of ordering a bigger beer and not even looking at the price difference. As you point out, we assume that we get a better “value” as we buy more.

Grocery stores sometimes do the same thing. They will have a small and a large size of something with the large size having a higher price per ounce. Again, they are taking advantage of something customers just believe to be true and typically don’t make an effort to verify.  Customers use mental shortcuts all the time to help them make decisions.

Is this a smart thing for BB King’s to do? The reason most companies price larger volumes at better values is to incentivize customers to buy more. That way they sell more and make more total profit.  Obviously BB King’s is not pricing for this reason.

Let’s break this down into two types of customers.  The first (like me) assumes they get a better deal as they buy more; he typically wants more, so he buys more. BB King’s makes additional profit on this customer because he didn’t do the math.

The second customer usually buys a small but is sometimes attracted to the better value of a large and buys the larger one. At BB King’s, this customer will see that buying more isn’t a good deal, so he will only buy a small. The bar loses out on what could have been incremental sales.

The best bet for BB King’s is to test it, to find out which pricing model generates more profit.

Assume that BB King’s does this test and finds what they are doing is more profitable.  Other bars will likely learn from that and begin to mimic BB King’s pricing strategy.  Eventually, customers will stop assuming that bigger beers are better values and the “trick” will stop working.  It only works for BB King’s because hardly nobody else does it.

They do need to consider one other issue: do customers ever get upset when they see this and think they are being tricked? Customers who feel mistreated may not return, and may negatively influence other customers and prospects. Ken, how did you feel?

This is certainly an interesting pricing situation.  Notice in many of these cases the best answer is “test it”.  What mental shortcuts do your customers make?

 

Photo by Ken (the same one who sent the email.)