The Australian Small Business Blog

Sunday, August 10, 2008

Buying and Selling on Price

All businesses should endeavour to create points of differences for their product or service, but what about if you are selling an undifferentiated product, something that is truly a commodity, such as petrol or even bottles of Coca Cola (which of itself is not a commodity, but you will get exactly the same product whether it’s from a milk bar or supermarket, here or across the country). Businesses that sell commodity products tend to sell with price as a point of difference.

There are two things that influence this:

  • geographical location (convenience and cost of supply), and
  • buyer knowledge of the market place.

Taking the first point, geography, this is about how far you are prepared to chase a bargain. You might drive across town to save $100 on a refrigerator, but would you do the same for a $1 saving on a six pack of Coke? Probably not. Economists call this the cost of shoe leather- this distance and effort you would give in time and money to achieve that saving.

What does this mean for your business? When setting commodity pricing, you only need to survey your competitors in your ‘economic’ neighbourhood.

The second factor influencing this is the buyer knowledge of your price difference. If they don’t know about it, they will not find you and may pay more than they should. This is why petrol stations have massive signs proclaiming their prices. Which brings me to the latest government efforts to increase consumer knowledge of prices. Will this really help small business and give lower prices to consumers?

First of all there is FuelWatch currently only operating in WA. Most motorists when they are low on fuel, like to fill up while they are already in their car on some other errand, rather than make a special trip. Generally this means they may pass half a dozen petrol stations (depending on the length of the trip) and will be able to see variations in price on station signage, and would be able to determine a good price for that part of their city at the time they are wishing to fill.

Service stations are highly competitive changing their prices several times a day. Can you think of any other product where that happens? The station owner will opportunistically drop their prices if their sales are low, and increase them when it is high. This is exactly how a good market should operate. By enforcing the price changes once per day, the motorist will be the loser. I would also expect that the independents will lose, as they are the most nimble. This will ultimately see a loss of competition- the opposite of what the government is trying to achieve.

The other scheme introduced by the government is GroceryChoice. In this scheme, the results that are reported are a month old, while grocery prices change at least weekly. (At least FuelWatch reported daily.) Also the baskets used are not transparent, so you have no idea whether this represents what you would buy. So consumers will ignore this, and still look to newspapers to see where the best prices are every week.

At one level, you might argue that this is a largely harmless waste of taxpayer funds, but there is a more ominous side. While people will not use this site much, when they do it will re-enforce the supermarket duopoly between Coles and Woolworths (Safeway). These two chains monitor their competition’s prices very closely. The website results prove this with only cents different between the two.

Where there is a significant difference is between the big chains and the independents whose prices are higher. Now there will be independents that are cheaper for some things than the big two, but because there are so many of them, the government has lumped them all together. However, from the consumer perspective, it ‘proves’ that they are cheaper than the independents. No wonder Coles and Woolworths love this! Once again, by interfering in the market, the government will drive the independents out and lessen competition, resulting in higher prices.

If businesses are selling commodities, and selling on price, advertising that fact is important, but when governments involve themselves in the marketplace to fix something that is not broken, casualties are inevitable and ultimately consumers and small business owners are the losers.

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.

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