September 24, 2016

The food market closest to my home went out of business recently, and was replaced by a supermarket chain. In most respects, the new store is an improvement over the one it replaced, except for one thing: its pricing system is permeated by buy-one-get –one-free offers.

I went to the store recently to buy some blueberries among other things. I wanted only one box of blueberries because if I purchased two, the second box would spoil before I ate them. I brought the one box to checkout to see whether I could buy it for half the stated price. The clerk said I could not, the price in her register was for two boxes. So I left the blueberries with her. The net result was that the store lost a sale and I had to find another source of blueberries.

I won’t disclose the firm’s name because I have no reason to believe that this irritating practice is limited to them. On the contrary, judging from TV ads, it seems to be a nationwide phenomenon.

Some merchandising genius came up with the idea that if you retain the price of a slow-moving item but throw in a second item with no charge, and if you describe the second item as “free” or better yet as “absolutely free,” you will sell more than you would have by halving the original price for one. I have no doubt that this works in the sense of stimulating sales in the short run. But the long-run impact could be just the opposite.

The Economics of Buy-One-Get-One-Free (BOGOF)

Assume a firm is overstocked with a perishable food, blueberries for example, and is comparing two ways to stimulate sales. The traditional and straightforward way is to cut the price, say from $4 a box to $2. The BOGOF alternative is to retain the $4 price but offer a second box free. Note that under the alternative the buyer who wants only one must pay $4 for it.

To assess these alternatives, we need to consider three categories of consumers, as follows:

·        The indifferent. These consumers will purchase 2 boxes when the price is $2, and they will pay $4 when offered BOGOF.

·        The soft heads. These consumers will purchase only one box when the price is $2, but shell out $4 when offered BOGOF. They are the target group, the source of the short-run success of BOGOF.

·        The hard heads. These consumers will purchase one box when the price is $2, but will be repelled by BOGOF and buy nothing.  As noted earlier, I am a hard head.

Sales will increase under BOGOF if the number of softheaded customers exceeds the number of hard heads, which is evidently the case in the short run. Over time, however, two things will happen to negate the benefit to the firm. The first is that some of the hard headed customers who have found that the firm they have been patronizing is not meeting their needs will take their business elsewhere. The second thing that will happen is that some of the soft headed customers who were seduced by BOGOF will discover that buying more than they need even at a bargain price is not a good idea, at which point they may swing from soft-headed to hard-headed. 

BOGOF Distorts Consumer Options Regarding Package Sizes 

Blueberry growers like all firms that produce goods for consumers invest considerable thought in how to package their products. Unit costs are always lower on larger packages, and this is reflected in their lower per-unit prices. However,   consumers become increasingly resistant to larger packages at lower unit prices because the required initial cash outlay is larger and the future need for larger amounts may not be clear. Nobody wants to die with a pantry full of unopened produce. So the package sizes selected by producers reflect a balance between the cost savings in large packages and consumer preferences for small packages.

When the firm that retails a product to consumers uses BOGOF to require its customers to buy 2 packages in order to get the correct price, there are no packaging economies because the retail firm is not creating a larger package. By requiring its customers to buy 2 packages in order to get the correct price, it is effectively removing the one package option. The small box of blueberries which the grower had decided was the right size to meet my needs was in effect removed from the shelf by my retail firm with BOGOF.