The other night a colleague from Ireland told me this story about his father.
Jack managed a small grocery store in Ireland many years ago. In Ireland, strawberries and cream were a popular dish, so Jack would buy strawberries for a shilling and sell them for 2 shillings. (The numbers are made up, but go with the point.) However, the store was closed on Sundays, so any strawberries that were not sold by Saturday night were thrown out. And that is what they did.
Then Jack got a new boss.
When the new boss heard of the practice of throwing away unsold strawberries, he told Jack to lower the price of strawberries on Saturday afternoon to a shilling. Jack protested, "we can't make any money selling them for a shilling, that's what we bought them for." But he did what the new boss ordered. They sold all of their strawberries by the time the store closed on Saturday, but many of them only at their cost.
Moment of truth
As my friend tells the story about his own father, "It wasn't until Sunday afternoon that he suddenly realised how brilliant this was."
What makes this brilliant? Two things:
First, purchasing the strawberries was a sunk cost. Once the store owned the strawberries, they would either sell them or throw them away. It is better to sell them at cost, or even below cost, than to trash them. The choice is some revenue or none. It's pretty obvious when you look at it that way. Sunk costs (money already spent) are never relevant to pricing decisions.
Second, customers who bought the strawberries (at cost) also bought cream. The store made plenty of money on cream. Notice that this is an example of pricing a product portfolio with complements. Pricing aggressively on one product, strawberries, influences the sale of complementary products, cream, at better margins.
The world is full of Jacks. Not stupid, just not aware of the nuances of pricing. We are always teaching.
Mark Stiving is a pricing strategist, runs Pragmatic Pricing, and is the author of Impact Pricing: Your Blueprint for Driving Profits.