12/16/2008
Gasoline Costs and the Psychology of Pricing
The other day I was nonchalantly filling up my tank. It only costs about $20 again. I made a vague mental note of the price – $1.79/gallon. I drove off and noticed another gas station nearby selling gas for $1.69/gallon.
Now the story gets interesting. I didn’t care. A few months back, when fuel was over $4.00/gallon, I’d have cared plenty. I would have driven miles to get an extra 10 cents a gallon off.
But then I got to thinking – the price differential, ten cents, was exactly the same. At $4.00/gallon, the $1.50 total saving became all important. At $1.79/gallon, the same $1.50 is less important.
Do you react the same way? What does it tell us about the psychology of pricing?
- One implication is that it is easier to make a wide margin when the market is weak. This is counter intuitive, but do you think it could be true?
- Another implication … when the market is weak, sellers should not sell on the basis of price. When the market is strong, they should.
Assuming my story is typical, it demonstrates that we do not behave strictly rationally when making price-value calculations. Market context is all important. Companies that blithely run the same promotions in good times and bad are missing opportunities to score better margins – just when they need them the most.
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15 Responses to Gasoline Costs and the Psychology of Pricing
Maybe it’s just me, but in fact the $1.50 differential meant less to me when it was high than it does now, when the price is low. That’s because it’s a much smaller percentage of the total than before – about 7% then vs. about 4% now.
So when the cost of gas is high, you can pretty much get your gas anywhere without wasting more gas searching for that “one cheapest source”.
So to me, when prices are high, it actually removes the incentive to shop around.
But then everyone knows, I’m, y’know, whacked.
p.s. Don’t want to make you jealous or anything, but I paid $1.41/gal for gas the other day. Just sayin’.
Robert Hruzeks last blog post..Mark the Date, Y’all!
Robert, Thank you for blowing that big hole in my argument.
Perhaps my thesis should be, you never know how people will react to pricing. But I can see your point. I wonder whether more more people are Bobs or Brads?
Hey, anytime, Bubba! I’m hear for ya!
I’m personally glad you didn’t say, “…Boobs or Brads?”
Robert Hruzeks last blog post..Mark the Date, Y’all!
Robert, Remember, this is a G-rated blog.
Funny… that’s what I was gonna tell you!
Robert Hruzeks last blog post..Mark the Date, Y’all!
Brad, I’m more like Robert. When it was high, I didn’t expend extra gas to shop around. However, your thesis about the rationale of price-value remains valid and a powerful point to ponder. I never thought of the takeaways from the gas pricing that could be applied to business. I imagine that this is one of the many reasons that pricing is not an exact science, even when asked consumers may answer one way but given market conditions they may not even follow their own “rules.” Great discussion Brad!
Karen Swims last blog post..Drunk with Power
Hi Karen, When gas prices were high, it felt like every penny counted. Now, every penny still counts, but it just doesn’t feel like it. To me anyway. It does make you wonder how accurately consumer behavior can be predicted at all.
Brad Shorrs last blog post..Gasoline Costs and the Psychology of Pricing
Brad, re your last comment, if all consumers are like your readers, I’d say behaviour is utterly unpredictable, and thank heaven for that!
Joanna Youngs last blog post..The Simple Power of Words
Hi Brad – I was thinking the same thing as Robert – re the percentage thing. It would seem a huge difference when prices are higher.
But as you say, if we’re selling something and the particular market is weak – maybe price isn’t so important.
You people are lucky – you pay less per gallon than we do per litre over here in the UK. Mind you, I think your gallons are slightly smaller than ours.
Cath Lawsons last blog post..Live The Dream In Vancouver, Canada
Hi Cath, Just in case you ever need it, here is a gallon -litre/litre-gallon converter. http://tinyurl.com/6ds4qz Looks like there are about 3.8 gallons in a litre.
Brad Shorrs last blog post..Gasoline Costs and the Psychology of Pricing
Uh, I think it’s the other way ’round, Brad… :-\
Robert Hruzeks last blog post..Mark the Date, Y’all!
Robert, Thanks for watching my back! I might have confused poor Cath for a minute there.
Brad Shorrs last blog post..Gasoline Costs and the Psychology of Pricing
Brad,
Please excuse me for sounding like an economics textbook recording here!
Whilst I can certainly understand the points made by both Robert and Cath, I would have expected the behavior of many consumers to be somewhat similar to your own behavior.
I would think that many consumers would become less price sensitive as price levels fall and the cost of an item represents a decreasing proportion of their income – I know this is usually true for in my own case.
Without meaning to discount the possibility that fuel purchases can provide interesting insights into business behavior, I think it is important to bear in mind that petrol is a highly commoditized product and it is very difficult for fuel retailers to differentiate themselves based on product or service quality.
Accordingly, any lessons relating to pricing strategy may or may not apply to firms which operate in industries where they are able to differentiate their offering based around product or service quality as well as price.
That said, I would have thought consumers would become less price sensitive as price levels fall.
Andrews last blog post..British sex industry – why a proposed new law should be rejected
Brad,
Please excuse me for sounding like an economics textbook recording here!
Whilst I can certainly understand the points made by both Robert and Cath, I would have expected the behavior of many consumers to be somewhat similar to your own behavior.
I would think that many consumers would become less price sensitive as price levels fall and the cost of an item represents a decreasing proportion of their income – I know this is usually true for in my own case.
Without meaning to discount the possibility that fuel purchases can provide interesting insights into business behavior, I think it is important to bear in mind that petrol is a highly commoditized product and it is very difficult for fuel retailers to differentiate themselves based on product or service quality.
Accordingly, any lessons relating to pricing strategy may or may not apply to firms which operate in industries where they are able to differentiate their offering based around product or service quality as well as price.
That said, I would have thought consumers would become less price sensitive as price levels fall.
Hi Andrew, Great point about commodities v. value added products. Perhaps the major value add of a service station is location. Stations with easy-in/easy-out access have a huge advantage. In the urban area where I live, some very nice stations are barely surviving because drivers find it too difficult to maneuver their way in and out, or access is limited to traffic flowing in only one or two directions.
Brad Shorrs last blog post..The Big Three’s Biggest Problem Is Neither Management nor the UAW