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resetreset 01-10-2013 07:50 AM

Why exactly are things cheaper by the dozen?
 
It's probably a very basic question for Economics people, but *I* don't get it - why is it so?

Snark1994 01-10-2013 08:07 AM

I'd assume it's to encourage you to spend more - and because you're buying more, there's more (absolute value) profit so they can afford a bigger discount. I guess also if you need 8 eggs, and they only have a 6 egg box and a 12 egg box, you're more likely to buy the 4 extra (unneeded) eggs because of the discount than you are to make do with 6.

Just some thoughts, I may be wrong! I guess another aspect of it is that it is now normal to do so - so people might think it strange if a shop didn't do so (or even, the shopowner may not properly think through the reasons for doing so, and just do it because "that's the way things are")

johnsfine 01-10-2013 08:16 AM

Imagine your customers didn't know what you typically charge and you had a way to charge each customer the maximum amount that customer was willing to pay, turning away only those customers who aren't willing to pay more than your cost. You would make far more profit than you could at any fixed price. A low fixed price makes you very little profit per sale. A high fixed price makes few sales.

In most sales situations, you can't come anywhere close to that kind of custom pricing. You know too little about your customers and they know too much about you. But you usually can do a little better than a single fixed price.

If you can offer the same product two or more different ways with differences in cost and convenience, you can make higher price sales to customers who aren't as worried about the cost, while also getting some sales to customers who aren't willing to pay that higher price.

The simplest and most common way to offer different prices on the same product is to have a group price lower than the multiple of the unit price.

There are a variety of other small efficiencies to selling in larger amounts less often vs. more frequent smaller sales, but the primary seller motivation for most such pricing decisions is to fragment the market and charge less for those customers who aren't willing to pay more.

floppywhopper 01-10-2013 11:06 AM

production is cheaper and more efficient in long runs
storage, warehousing and distribution is usually cheaper
packaging, shelving all come into it

jefro 01-10-2013 08:35 PM

In the not too distant past this phrase was coined. It sprang from basic shopping for home goods. A common amount was 12 or in the case of bread 13, where they coined the phrase a bakers dozen. When you bought 12 they gave you another. It was cheaper by the dozen.


It represents the cost associated with a sale. If, for example, you said that your cost to sell a single item is $5 then you add that and the price you paid for it together. It also takes the exact amount to sell one as it does 12. So you can afford to give your best customers a break on larger purchases.

Gold is not an example of scale of economy. Diamonds are however.

Garda 01-10-2013 10:12 PM

Basically what everyone above has said:

Generally things get cheaper with scale.

If you sell alot of things at once, it guarantees a certain profit from this customer (as opposed for example to you buying 6 now and 6 later from a competitor). More importantly, the costs associated with a single purchase, (retail staff, you're time in the line (consuming cashier times), etc.) are all fixed, no matter the number you buy.

ruario 01-11-2013 12:38 AM

Quote:

Originally Posted by Garda (Post 4867495)
Generally things get cheaper with scale.

Some things get a lot cheaper ;)

http://www.amazon.com/Passion-Natura.../dp/B005MR3IVO

resetreset 01-11-2013 09:51 AM

Quote:

Originally Posted by johnsfine (Post 4867032)
In most sales situations, you can't come anywhere close to that kind of custom pricing. You know too little about your customers and they know too much about you.


Ahh, John you've put your finger on it - but after the internet we CAN, right? That's how cheap internet airlines work....? (and of course, they do price their tickets higher the closer you get to the flight date, but that's a different thing altogether). What IMPLICATIONS does this have for us? Is there anybody RESEARCHING this type of thing? It sounds Extremely Fascinating to me!

sundialsvcs 01-11-2013 12:11 PM

... because people like my parents are easily convinced that a gigantic box containing boxes of breakfast cereal or toilet-paper or pork 'n beans are "a really good buy." (Fortunately, they have a big garage to go along with their lifetime membership in Sam's Club.)

johnsfine 01-11-2013 12:26 PM

Quote:

Originally Posted by sundialsvcs (Post 4867913)
... because people like my parents are easily convinced that a gigantic box containing boxes of breakfast cereal or toilet-paper or pork 'n beans are "a really good buy." (Fortunately, they have a big garage to go along with their lifetime membership in Sam's Club.)

When things actually are cheaper in bulk (as in the title question of the thread), why do you think your parents' purchases aren't a good buy?

I buy the multi-bag giant boxes of cereal at Costco, the giant box of boxes of tissues, the big box of cans of chili (different in detail, not concept, from your pork 'n beans). All of those are good buys. None of it ever reaches its expiration date before we use it up. I know what those products cost at the supermarket and I buy them at Costco because that beats the supermaket per unit sale price. I don't buy the TP at Costco, because the sale price at Market Basket is better. I buy more loose rolls at once during that sale than three of the bulk Costco packages, so it will last until the next sale.

Some of the bulk packaging is just a trick for consumers who can't do simple math. The bulk prices at Costco might be more per unit than the regular price at Market Basket. Market Basket also has some bulk packaged items and they don't necessarily have a better unit price than the same brand of the same item at the same time sold individually. Segmenting the market by math skill can be more profitable than segmenting the market by tolerance for the minor inconvenience of bulk.

If your parents are convinced those bulk purchases are a good buy, just because they are bulk, then that is the point you should have made. But if you just look down on their saving a little money through some extra effort shopping and storing products, then shame on you. Just thank them for whatever extras they were able to give you through similar care and effort when you were younger.

BTW, I'm lucky to live in a part of the country with a regional super market chain that beats almost everyone's prices on everything. I buy clothes etc. at Walmart, but when I look at Walmart's grocery prices (that in other parts of the country clobber ordinary supermarkets) I almost never see anything competitive with Market Basket. When I have checked out Sam's club with the occasional short time free membership or accompanying a friend, I have the same reaction. Why would I pay for the right to go to extra inconvenience for purchases that don't beat MB's ordinary prices. Even Costco is only worth while because I remember prices and know which few are better than MB and have three sons living at home (fourth there as well, this month) so we use a lot of those things.

resetreset 01-12-2013 01:52 AM

John? Do you want to react to what I said?


What is Costco? And Market Basket? Why're you guys assuming that everyone here is American?

johnsfine 01-12-2013 07:01 AM

Quote:

Originally Posted by resetreset (Post 4867810)
Ahh, John you've put your finger on it - but after the internet we CAN, right? That's how cheap internet airlines work....? (and of course, they do price their tickets higher the closer you get to the flight date, but that's a different thing altogether). What IMPLICATIONS does this have for us? Is there anybody RESEARCHING this type of thing? It sounds Extremely Fascinating to me!

Quote:

Originally Posted by resetreset (Post 4868231)
John? Do you want to react to what I said?

If I had further insight into to the aspect of it you brought up, I probably would have posted that already.

I already gave my opinion that the market segmentation effect of a bulk price is more important to the seller than the direct efficiencies of bulk. More basic concepts related to this are in the "explanation" section of the Wikipedia page on "price discrimination"
http://en.wikipedia.org/wiki/Price_d...on#Explanation

Quote:

What is Costco? And Market Basket? Why're you guys assuming that everyone here is American?
Most Americans won't know what what Market Basket is either. It is regional. From context, I thought it was clear Costco was a competitor to Sam's Club (that sundialsvcs mentioned) both stores specializing in bulk sales. Costco also heavily relies on restricted selection to reduce their purchasing costs and allow them to sell for less. In a given product category Costco might negotiate with all the major brands to find one that is willing to give the biggest discount in return for being the only brand sold at Costco. In other product categories, they carry a few brands. Sam's club generally has a greater selection but worse prices, which in my opinion defeats the purpose of shopping there.
http://en.wikipedia.org/wiki/Sam%27s_Club

moxieman99 01-14-2013 11:56 AM

Quote:

Originally Posted by resetreset (Post 4867011)
It's probably a very basic question for Economics people, but *I* don't get it - why is it so?

1. Economies of scale in production lead to lower unit costs, therefore more room to undercut competitors' prices per unit and still make a profit target. Consequently, cheaper by the dozen.

2. Desire for liquidity (cash is liquid, apples (or cars) are not). Rather than having value tied up in an illiquid asset, I can sell the asset and transfer that value into cash (liquid asset). Hence I have an incentive to sell as much as I can in each transaction, in order to: a) reduce transaction costs, and; b) move as much inventory (illiquid asset) as possible in one go.

3. Related to #2 is the fact that there are carrying costs for illiquid assets that are not present with liquid assets. If I borrowed money to buy the asset for sale (apples, cars), I have a carrying cost -- interest on the loan. I also have a carrying cost for the maintenance of the asset -- a store, parking lot, employee wages, etc., that I can avoid, or spread over a larger number of units sold, by selling in bulk.

As a practical matter, the efficiencies of production scale and the reduction of transaction costs per unit sold make for most of the reduction in price.

Bottom line: "Cheaper by the dozen."

johnsfine 01-14-2013 12:51 PM

Quote:

Originally Posted by moxieman99 (Post 4869803)
1. Economies of scale in production lead to lower unit costs

But you haven't established any connection between total sales volume and average transaction size. Rewarding your customers for a higher average transaction size directly leads to larger but fewer transactions together with lower average unit sale price. It is unclear whether or why that might lead to a greater improvement in total sales volume compared to simply applying that same unit price decrease to all sales.

So Economies of scale in production have no direct link to economies of scale in transaction size.

Quote:

2. Desire for liquidity (cash is liquid, apples (or cars) are not). Rather than having value tied up in an illiquid asset, I can sell the asset and transfer that value into cash (liquid asset). Hence I have an incentive to sell as much as I can in each transaction
You don't have any experience in retail management, do you? That effect goes exactly the opposite way. You have a reorder time for the product. You try to keep enough on hand to avoid going out of stock, that means you have some extra on hand above the expected amount that might be sold before the next order comes in.
Offering a significant quantity discount increases the week to week variation in your sales. So the extra amount you need to keep to maintain a given low probability of going out of stock is increased without a corresponding increase in total sales. Also, the decrease in average unit price would increase the relative carrying cost even if the less predictable sales rate hadn't increased the absolute carrying costs.

Quote:

As a practical matter, the efficiencies of production scale and the reduction of transaction costs per unit sold make for most of the reduction in price.
The reduction in transaction cost per unit is a real cost difference and justifies some of the bulk discount. But in the real world, the bulk discount is not an attempt to better fit price to cost. It is an attempt to have a worse fit of price to cost as explained in the "price discrimination" page I linked to.

moxieman99 01-14-2013 03:15 PM

Quote:

Originally Posted by johnsfine (Post 4869849)
But you haven't established any connection between total sales volume and average transaction size. Rewarding your customers for a higher average transaction size directly leads to larger but fewer transactions together with lower average unit sale price. It is unclear whether or why that might lead to a greater improvement in total sales volume compared to simply applying that same unit price decrease to all sales.

So Economies of scale in production have no direct link to economies of scale in transaction size.

If I can buy large amounts (lower production costs due to economies of scale, so lower wholesale costs to me) I can move the merchandise faster (the large amount I bought as a shopkeeper) by selling larger quantities at a time (lowering transaction costs). This allows me to keep buying large amounts (at lower cost per unit) from the manufacturer, or move on to something else.


Quote:

Originally Posted by johnsfine (Post 4869849)
You don't have any experience in retail management, do you? That effect goes exactly the opposite way. You have a reorder time for the product. You try to keep enough on hand to avoid going out of stock, that means you have some extra on hand above the expected amount that might be sold before the next order comes in.

Actually, quite a bit of retail management, and the effect is as I describe. IF I want to reorder (and continue getting bulk purchase discounts), then it behooves me to sell as quickly as possible, which means offering discounts for retail purchases of large quantities. If i don't want to reorder, then I want to recoup as much money (and profit) as I can as quickly as I can, so I can move on to some other product on which to put my overhead. Again, that means offering bulk discounts.

Quote:

Originally Posted by johnsfine (Post 4869849)
Offering a significant quantity discount increases the week to week variation in your sales. So the extra amount you need to keep to maintain a given low probability of going out of stock is increased without a corresponding increase in total sales.

No, that's where market research comes in. Costco (giant US retailer, see above)has fairly small variations in sales volumes, even though it sells in bulk. Bulk per se doesn't lead to weekly variations. Offering bulk sales when it is unusual does increase sales volumes (read "variation") but that is also when one is trying to clear the illiquid asset (foodstuffs nearing best by dates, for example) by converting it into liquid assets (money). What one needs to do is find out market factors that lead to variations in demand and order accordingly. Bulk sales, per se, are not a factor.

Quote:

Originally Posted by johnsfine (Post 4869849)
Also, the decrease in average unit price would increase the relative carrying cost even if the less predictable sales rate hadn't increased the absolute carrying costs.

The sales rates are highly predictable if one has done his market research. That's not a function of how big each sale is. Besides, what you are confusing here with economics is logistics. If I can order properly, and process the order properly, with just in time delivery, then I can maintain or even reduce carrying costs. That has nothing to do with whether I sell 100 apples in 10 sales of 10 each or in 100 sales of 1 each (although 100 sales at 1 each would incur vastly higher average variable costs due to the cost of the cashier having to ring up one apple in 100 different transactions). The demand was still for 100 apples in each "market."

Sales projections are very accurate, and are not the source of most variations in sales that lead to bulk sales. Hence Costco, bulk seller, and WalMart, ditto, probably have low sales variations, and those variations are not caused by bulk sales to customers. They also know enough to come in out of the rain: If the season for an item is over, they don't order it.

Quote:

Originally Posted by johnsfine (Post 4869849)
But in the real world, the bulk discount is not an attempt to better fit price to cost.

Nonsensical statement, since price is never fit to cost. It is fit to what the market will bear. Bulk sales are simply a way to entice purchases at the lowest possible transaction cost per unit, thus maximizing profits and maximizing possible options (If I have a higher profit by means of lower average variable costs through using bulk sales, then I have the option of lowering prices still more (and losing some "profit") in order to move more merchandise, should I choose to do so.) Bulk discounts are all about reducing transaction costs per unit and capturing economies of scale. It is not a question of "fitting price to cost."


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